Investing
STRIKING THE RIGHT BALANCE IN FIXED INCOME – IT’S NOT SIMPLY DURATION
Published by Gbaf News
Posted on July 26, 2016
7 min readLast updated: January 22, 2026
Global Banking and Finance Review
Company
Published by Gbaf News
Posted on July 26, 2016
7 min readLast updated: January 22, 2026
By Matthew Toms, Investment Analyst at Heartwood Investment Management
Logic dictates that borrowers should pay lenders and not the other way round. However, the world of negative interest rates is defying that logic and investors are increasingly challenged to find value across global fixed income markets when yields are so low. Going forward, the risk is that investors are likely to capture more of the downside in market sell-offs than upside in market rallies, and therefore we anticipate higher levels of bond market volatility.
Managing fixed income in the current environment is more challenging and demands investors stay focused on preserving capital as well as seeking return. Over the last few years, investors could make attractive returns from investing in longer- duration assets as yield curves flattened. However, we believe there is less value to be found by simply taking duration exposure alone, as well as more downside risk.
Yields are unsustainably low
Of course, it would be impossible to determine with any certainty the point at which interest rates will start to rise; for now we remain under the scenario of ‘lower for longer’. However, there are rational reasons to believe that yields at current levels are unsustainable:
It is therefore important that investors are be able to strike the right balance between participating when bond prices are rising and avoiding getting caught out should yields move meaningfully higher, such as during the taper-tantrum episode in mid-2013. It is a difficult conundrum, but we believe the optimal risk/return approach is twofold.
Stay short, but seek higher yielding opportunities
First, we believe it is important to stay fully invested in government bonds on a market weight basis, but in short -duration assets that we would be happy to hold to maturity should interest rates rise. While this position will not always fully participate if bond markets rally, it should help to preserve capital if yields rise sharply.
Second, we are holding a bias towards some higher yielding areas of the credit market. We believe that the current environment is ripe for active investors who are able to cast their net wider and search out value in more esoteric areas of an
$87 trillion global fixed income universe [Source: Bank of International Settlements]. In the post-financial crisis years, banks have retrenched from lending, fueling growth in public debt markets – euro high yield, emerging corporate debt, as well as specialist areas, including infrastructure and peer-to-peer lending. These sectors are less duration sensitive and offer investors a higher yield premium for the credit risk taken (i.e. risk of default). Within our own portfolios, we have been increasing exposure to emerging market sovereign debt and US high yield energy bonds, where valuations look more attractive relative to sovereign bond yields. In addition, we are continuing to seek out yield opportunities in property and infrastructure.
By Matthew Toms, Investment Analyst at Heartwood Investment Management
Logic dictates that borrowers should pay lenders and not the other way round. However, the world of negative interest rates is defying that logic and investors are increasingly challenged to find value across global fixed income markets when yields are so low. Going forward, the risk is that investors are likely to capture more of the downside in market sell-offs than upside in market rallies, and therefore we anticipate higher levels of bond market volatility.
Managing fixed income in the current environment is more challenging and demands investors stay focused on preserving capital as well as seeking return. Over the last few years, investors could make attractive returns from investing in longer- duration assets as yield curves flattened. However, we believe there is less value to be found by simply taking duration exposure alone, as well as more downside risk.
Yields are unsustainably low
Of course, it would be impossible to determine with any certainty the point at which interest rates will start to rise; for now we remain under the scenario of ‘lower for longer’. However, there are rational reasons to believe that yields at current levels are unsustainable:
It is therefore important that investors are be able to strike the right balance between participating when bond prices are rising and avoiding getting caught out should yields move meaningfully higher, such as during the taper-tantrum episode in mid-2013. It is a difficult conundrum, but we believe the optimal risk/return approach is twofold.
Stay short, but seek higher yielding opportunities
First, we believe it is important to stay fully invested in government bonds on a market weight basis, but in short -duration assets that we would be happy to hold to maturity should interest rates rise. While this position will not always fully participate if bond markets rally, it should help to preserve capital if yields rise sharply.
Second, we are holding a bias towards some higher yielding areas of the credit market. We believe that the current environment is ripe for active investors who are able to cast their net wider and search out value in more esoteric areas of an
$87 trillion global fixed income universe [Source: Bank of International Settlements]. In the post-financial crisis years, banks have retrenched from lending, fueling growth in public debt markets – euro high yield, emerging corporate debt, as well as specialist areas, including infrastructure and peer-to-peer lending. These sectors are less duration sensitive and offer investors a higher yield premium for the credit risk taken (i.e. risk of default). Within our own portfolios, we have been increasing exposure to emerging market sovereign debt and US high yield energy bonds, where valuations look more attractive relative to sovereign bond yields. In addition, we are continuing to seek out yield opportunities in property and infrastructure.
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