Even with a lower natural rate of interest, most investors will agree that interest rates are biased upwards over time. The timing of this rise is one of the big macro theme trades in 2015. The consensus looks like we will have to wait longer for a rise but it will be coming. Of course, the wait for rising rates was long in Japan and many a trader was hurt with JGB trades, but it hard to argue that negative yields will be the long-term norm for Europe.
Investors still cling to their fixed income allocations under the hope that their managers will be able to shorten duration when rates rise. There has also been the development of multi-strategy bond funds as a means of better managing duration. The key action of most fixed income managers to a rate rise will be to cut duration versus a benchmark. Most fixed income managers will take pride in the fact that they had lower duration and lost less then the Barclay's Aggregate Index, but that does not change the fact that they will have a negative absolute return.
This approach is not much different than the equity manager who has a lower beta than the stock index. It is the driver for many long/short equity hedge funds. The safe strategy is learning to take less beta exposure.
The general fixed income bet of lower duration was still an effective strategy over the last few decades because bonds were in an extended rally. Bond investors made less money but still made money by holding bonds. The future environment will be different. First, with lower coupon rates, there is a less cushion with holding a bond portfolio. Second overall durations have also extended with lower yields.
The question is where can a bond investor get negative duration. One of the few places for negative duration is the managed futures and global macro space. Shorting bonds will provide the negative duration.There is no long bias so a rising rate trend will create an opportunity for trades with negative duration exposure. The resurgence of managed futures may be linked to the fixed income hedge.
Investors still cling to their fixed income allocations under the hope that their managers will be able to shorten duration when rates rise. There has also been the development of multi-strategy bond funds as a means of better managing duration. The key action of most fixed income managers to a rate rise will be to cut duration versus a benchmark. Most fixed income managers will take pride in the fact that they had lower duration and lost less then the Barclay's Aggregate Index, but that does not change the fact that they will have a negative absolute return.
This approach is not much different than the equity manager who has a lower beta than the stock index. It is the driver for many long/short equity hedge funds. The safe strategy is learning to take less beta exposure.
The general fixed income bet of lower duration was still an effective strategy over the last few decades because bonds were in an extended rally. Bond investors made less money but still made money by holding bonds. The future environment will be different. First, with lower coupon rates, there is a less cushion with holding a bond portfolio. Second overall durations have also extended with lower yields.
The question is where can a bond investor get negative duration. One of the few places for negative duration is the managed futures and global macro space. Shorting bonds will provide the negative duration.There is no long bias so a rising rate trend will create an opportunity for trades with negative duration exposure. The resurgence of managed futures may be linked to the fixed income hedge.
No comments:
Post a Comment