He says not all countries or economies are at the same point of the interest rate cycle, for example some countries in emerging markets may cut rates sooner than is likely to happen in developed markets, and if rates are being cut in one jurisdiction, but raised in another, that may represent an opportunity for diversification as each of those bond markets has its own yield curve.
Alberto Matellán, chief economist at MAPFRE, says for clients with income as a priority, the present level of yield is sufficiently high, so they do not need to worry about prices and consequently of interest rate risk.
PIMCO's representative says: "Our base case projections anticipate core inflation will trend lower but linger above central bank targets for several quarters in the US, Europe, and some other developed economies.
"This path to central bank targets may also be bumpy and could include a slight re-acceleration in core inflation over the next few months. Monetary policy takes time to filter through the economy, though, raising the risk of a recession when the full impact of the sharpest tightening cycle in decades is felt."
The representative adds: “As shorter-term yields have risen, we’ve increased our interest rate exposure, particularly in the front and intermediate portion of the curve.
"An inverted yield curve, where short-term rates are higher than long-term rates, enables us to seek attractive income without taking significant interest rate risk further out the curve.
"If yields were to rise meaningfully from here, we may increase our interest rate exposure across our portfolios further, so that we can benefit from lower prices, and capitalise on this when interest rates fall again (and bond prices increase).”
Howard Cunningham, fixed income portfolio manager at Newton Investment Management, says that while he has a view on the level of rate risk to take right now, his conviction is dented by the technical factors described above, and how those could trump the interest rate call, even if he gets the latter correct.
He says: “We are weighing up the relatively attractive yields on offer and the prospects of capital gains, should economic growth slow dramatically against the very high levels of gross and net issuance.
"With the fiscal deficit being quite elevated (not helped by higher debt service costs), central banks turned sellers of bonds, and certain overseas investors less attracted to western bond markets.
"Additionally, both the absolute number and where on the curve it is derived from are both important. You can have the same duration by being bulleted in the middle of the curve or barbelled at either end. The combination of high front end rates and steepening of the long end of the curve leads us to favour."
