Three charts bond investors need to see ahead of this week's Bank of England meeting

Three charts bond investors need to see ahead of this week's Bank of England meeting

Market commentary
31 October 2017

Nicolas Trindade, senior fixed income portfolio manager, highlights three charts ahead of this week’s Bank of England meeting.

The Bank of England has indicated it could tighten monetary policy in the very near future, leaving some investors concerned about what this means for their bond portfolios. Since May’s Inflation Report, the Bank has adopted a more hawkish tone, seemingly laying the groundwork for an interest rate hike. Many are now expecting this to be announced following its upcoming 2 November meeting.

Despite the conjecture, if interest rates do move up from their historic low of 0.25%, it is still likely to cause some shock given it’s been more than a decade since investors last witnessed a rise. The post-crisis backdrop of ultra-loose monetary policy has been kind to investors in general. But bond holders have grown gradually more vulnerable to rate hikes, as the sterling bond market has a higher duration than it did 10 years ago, while offering investors lower yields.

Here are three key charts illustrating the current outlook for bond investors:

1. The sterling credit universe is now more than three times as sensitive to a rise in yields than it was 10 years ago:

2. Short duration bonds can provide mitigation against today’s rising yield environment as they naturally mature earlier, allowing reinvestment at higher rates.

3.The sterling credit market’s yield curve has flattened, lowering the cost of buying short duration and providing an attractive entry point relative to history:

While an interest rate hike in November is by no means guaranteed, rhetoric from policymakers firmly suggests there will be a gradual withdrawal of monetary stimulus over the coming months. Understanding the potential benefits of short duration bonds in this environment will therefore be crucial for mitigating interest rate risk.




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