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February 2022 / GLOBAL FIXED INCOME

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).

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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Focused on Fundamentals in an Unsettled Market
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