Flexible to the core

Introduction

  • After an unprecedented 30-year run of declining interest rates in the United States, many investors are preparing themselves for a rising interest rate environment.
  • As they access the implications of potentially higher rates for their investment portfolios, many investors may be looking for ways to harness more diverse sources of risk and return.
  • Manulife Asset Management’s global multi-sector fixed income team explain how a truly diversified bond portfolio can help mitigate interest rate risk while maximising opportunities from other important drivers of returns such as credit, liquidity, and currencies.

In the early 1980s, the combination of a flagging economy and high inflation led to record-high interest rates, as measured by the 10-year U.S. Treasury. It was a situation that couldn’t last, and as the economy regained its footing and inflation returned to more normal levels, investors in passive strategies—who therefore had significant exposure to Treasuries—reaped the benefits.

Looking ahead, however, investors should be cautious about tying too much of their portfolios’ performance to changes in interest rates. The other significant drivers of bond returns, specifically, credit quality, liquidity, and currency fluctuations, can offer attractive risk/return profiles  and strategies with more flexible mandates can be well positioned to take advantage of these..

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