Bond market more sensitive to yields

The bond market is significantly more sensitive to changes in yields today than it was 10 years ago, according to Janus Henderson Investors.

Australian fixed interest portfolio manager Jay Sivapalan explained in a stable or rising yield environment, the instances or frequency of negative returns out of the bond market is greater in both magnitude and frequency.

“Ten years ago it took a 20-basis-point rise in yields to wipe away the coupon income in any given month. Today it only takes a five-basis-point rise to wipe away the coupon income in any given one month,” Sivapalan said.

“That’s because the average tenor or the duration of the bond market’s extended because borrowers, the opposite of us investors, have been [borrowing] for longer term, trying to lock in low rates, which have made the bond markets much more sensitive.”

While he said he expected the Australian fixed interest market and the Australian market in general to outperform over the course of 2018 relative to markets such as the United States, he cautioned against becoming complacent, adding portfolio managers must always be considering the management of downside risk.

However, Sivapalan said active managers should be taking advantage of this volatility as it creates exciting opportunities.

The fund manager was currently more at ease with valuations compared to 18 months ago when they were very expensive and bond yields were at ultra-lows, and this was reflected in their duration position, he noted.

Sivapalan overlaid the Janus Henderson Tactical Income Fund returns with the bond market, which showed that over the past 18 months, the fund delivered three negative returns against a bond market that delivered about 25 negative returns, with each of those three negative returns materially smaller than the outcomes of the bond market.

“So absolute return strategies are best placed for this environment: a rising rate environment, stable rate environment, where the manager has the full flexibility and does take advantage of and make use of the interest rate risk that they can control,” he said.


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