Last year, investors were faced with bond yields at all time lows, while the outlook for economic growth looked increasingly positive. This sparked some concerns over the possibility of rapidly rising interest rates.
But investors are now increasingly accepting that we might be faced in a low yield, low growth environment for much longer than thought possible. What to do when faced with such difficult conditions?
The obvious strategy to take is to go shorter duration, increase allocations to credit and potentially add some safety in the form of inflation-linked bonds. But is that all you can do, or are other, more opportunistic, possibilities that might help you enhance returns or help preserve capital?
- Geopolitical turmoil has created volatility in currencies and this could lead to short-term opportunities.
- The modest rise in bond yields has also created arbitrage opportunities, such as the deviation between cash and futures bond prices.
- Regulatory changes have also added to arbitrage opportunities that in some cases seem to be permanent, albeit small in size.
- Continued efforts to address environmental, social and corporate governance (ESG) issues has seen the rise of new instruments, such as climate change or green bonds. How large of an opportunity are those?
At the same time, investors work within constraints set by their investment strategy, objectives and regulatory limits. To what extent should you make use of these opportunities or will it put you on a slippery slope to become a short-term investor or trading vehicle? These questions will be discussed at the second [i3] Fixed Income, Credit & Currency (FICC) Forum.
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