Bonds in 2017: stick or twist?


Craig Inches, Head of Short Rates and Cash and Paola Binns, Senior Fund Manager

27 March 2017

Investors who have chosen to ‘stick’ in longer dated bonds have enjoyed exceptionally strong capital returns over the last three years, but against backdrop of potentially rising yields, and ongoing political risk, we think it’s time to ‘twist’ into shorter duration assets.
Given the upturn in global growth and inflation, we expect yields to rise in 2017. As shorter duration bonds are less sensitive to yield movements than longer duration bonds, the best way to protect against capital losses in this environment is to adopt a short duration position. But with short-dated government bonds currently yielding very little and inflation expected to rise to around 2.7% this year, how can investors protect their capital and continue to generate income?
Corporate bonds are a natural choice for investors seeking to diversify and maximise income. Our approach to corporate bond investing prioritises value and security, aiming to exploit market inefficiencies to maximise income in a risk controlled way. By selecting bonds that offer protection through their structure or specific covenants, we seek to enhance income security by improving the chances of recovery in the event of a default. 
At RLAM, we have a number of short duration funds, whose lower interest rate sensitivity shields against rising yields and volatility, while benefiting from the enhanced protection afforded by our focus on value and security.

Investors who have chosen to ‘stick’ in longer-dated bonds have enjoyed exceptionally strong capital returns over the last three years, but against a backdrop of potentially rising yields, and ongoing political risk, we think it’s time to ‘twist’ into shorter duration assets.

Given the upturn in global growth and inflation, we expect yields to rise in 2017. As shorter duration bonds are less sensitive to yield movements than longer duration bonds, the best way to protect against capital losses in this environment is to adopt a short duration position. But with short-dated government bonds currently yielding very little and inflation expected to rise to around 2.7% this year, how can investors protect their capital and continue to generate income?

Corporate bonds are a natural choice for investors seeking to diversify and maximise income. Our approach to corporate bond investing prioritises value and security, aiming to exploit market inefficiencies to maximise income in a risk controlled way. By selecting bonds that offer protection through their structure or specific covenants, we seek to enhance income security by improving the chances of recovery in the event of a default. 

At RLAM, we have a number of short duration funds, whose lower interest rate sensitivity shields against rising yields and volatility, while benefiting from the enhanced protection afforded by our focus on value and security.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.