How should we approach bond management as the end of a bull market cycle un- precedented in terms of its size and duration begins? Over the past two decades, bond portfolios have been boosted by the steady fall in interest rates. This has reduced the importance of bond selection – all investors have needed to do to prosper has been to increase their portfolio’s duration and its exposure to credit risk and less liquid assets.
But now, against a backdrop of persistently low interest rates and increasingly stringent regulations, risk management has become a major concern for bond investors. This has been reinforced by an increase in market uncertainties: in Europe, political risk has come to the fore and growth prospects are falling, forcing the European Central Bank to postpone rate hikes, although it is withdrawing its program of massive liquidity injections. In the US, meanwhile, the future direction of long-term rates, which currently seem to be peaking, is unclear.
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