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Helping Global Bond Investors When Duration Fails

Strategies to reduce potential duration-led losses.

Key insights

  • Global bond investors could face significant risks from rising yields in 2022 and long duration portfolio holdings. Many seek ways to mitigate these risks.
  • Our studies suggests lowering duration on government bond portfolios to around two years may significantly reduce or even prevent losses from rising yields.
  • An alternative option would be to adopt an unconstrained global bond portfolio, giving the manager full discretion over both country and duration strategy.

Many fixed income investors have been asking about the implications of rising interest rates, especially now that markets are beginning to discount the first rate hikes by the U.S. Federal Reserve earlier than had seemed likely a few months ago. While the Fed initially saw the emergence of post coronavirus pandemic inflation as transitory, the increase in prices has been far more persistent than they had earlier hoped for. This led Fed Chair Jerome Powell recently to say it was time to retire the term “transitory” as a description of current inflation. Even if inflation falls back to 3% to 4% per cent, it may be a long time before it is back at the Fed’s 2% per cent target. 

In the current environment, index-aware global bond investors face significant risks posed by a combination of rising market yields in 2022 and long duration portfolio holdings. They have become increasingly concerned over their exposure to rising rates, how quickly rates will rise, and just how large the potential drawdown on a portfolio of global government bonds might be. In this Insights note, we try to address some of these key concerns, in particular what can be done to mitigate the risks from rising rates.  

In this Insights note, we try to address... what can be done to mitigate the risks from rising rates.

We believe that one possible solution is for investors to take steps to mitigate potential duration-led losses ahead of any major upward move in yields. To succeed in this, decisive action will be required by asset owners to ensure that their fixed income managers have the flexibility they need to manage duration risk more aggressively in the elevated inflation, rising yield environment that beckons in 2022. 

See the full report (PDF).


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