The announcement last week by the US Federal Reserve that it will begin reversing quantitative easing signals the end of the 30-year bull market, Architas investment director Adrian Lowcock says, and investors need to assess their fixed income holdings.
The Fed has already begun raising interest rates and has indicated further rate rises are likely, possibly one this year and three more in 2018. Furthermore the central bank will begin tightening monetary policy, withdrawing $10bn each month from October, with the sum rising to $50bn a month, or $600bn per annum, by October 2018.
Interest rate rises could also be seen in the UK this year, while the European Central Bank is widely expected to taper its quantitative easing programme.
Lowcock says that after 10 years of central banks supporting the bond market, the full impact of the Fed’s announcement “has perhaps not yet sunk in”, adding that: “the 30-year bull bond market is coming to an end”.
“The change is huge; currently central bank’s balance sheets continue to expand by over $1,000bn on an annualised basis as the Bank of Japan and the European Central Bank continue with QE. With the US withdrawing stimulus and the ECB expected to begin tapering this amount could halve in 12 months, before turning negative in 2019.”
Lowcock adds: “Investors need to review their existing bond investments and make sure they are still suitable for this new environment and make any changes before the market does it for them.”
Lowcock recommends the Artemis Strategic Bond fund, the MI Twenty Four AM Dynamic Bond fund and the Royal London Sterling Extra Yield Bond fund.
Run by James Foster and Alex Ralph, the Artemis Strategic Bond fund has an unconstrained top-down approach and is short German government bonds and US Treasuries “in response to the willingness of central banks to raise interest rates”. With a bias towards high yield, the fund has a yield of 3.95 per cent.
The MI Twenty Four AM Dynamic Bond fund is another unconstrained fund with a “best ideas” approach, Lowcock says. With a larger allocation to illiquid investments and a higher-than-usual exposure to asset-backed securities, the fund can be volatilr, but currently yields 4.76 per cent.
Eric Holt, manager of the Royal London Sterling Extra Yield Bond fund, takes a bottom-up approach and focuses on unrated investments, which Lowcock says differentiates the fund from other UK corporate bond funds, but also means it is riskier. The fund currently yields 6.10 per cent.