The 1% yield dilemma

In a world where over US$21trn of global sovereign bonds trade below 1%[1], we believe the risks of passively investing in fixed income assets at low yields are twofold.

The first is self-evident: low rates of return are unattractive and negative yields guarantee a loss of capital if the investment is held to maturity. The second risk involves the inverse relationship between bond yields and bond prices. With this in mind, not only do investors have to contend with low rates of return on ‘safe assets’, but risks to their capital are asymmetric – the potential capital losses outweigh the potential gains.

Against this backdrop, we believe it makes sense to adopt a fixed income strategy that can use appropriate derivative tools to protect its portfolio from the effect of rising yields and also make money from changing rates.

In our view, active managers who have the freedom to invest anywhere in the world, anywhere along the yield curve and across a range of duration- and inflation-related opportunities are well placed to mitigate the risks of our sub-1% yield world.

Adam Mossakowski – Insight Investment, a BNY Mellon company

[1] Bloomberg., 5 July 2016

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