“Therefore, you have to be careful on duration risk. It would be a good idea to shorten nominal bonds for example,” he said.
John Gikas, manager of the Eurobank Absolute Return Fixed Income Fund, agreed. “I think we obviously should cut duration now,” he said.
Perhaps unsurprisingly, the three unconstrained bond fund managers on the panel were in agreement that the current investment backdrop requires bond portfolio managers to be highly flexible.
“We have to be more creative, and continue switching between asset classes to generate better returns,” said Colin Finlayson, manager of the Kames Strategic Bond fund.
Gikas stressed that, while he is short on duration at the moment, that could change quickly. “I think there will be some opportunities at the long end of the US Treasury curve for example, if we see a decent sell-off over the coming months.”
If interest rates rise in tandem with inflation, that may spoil the party for inflation-linked bond investors. More is therefore needed to future-proof your fixed income portfolios. In the second part of these series, to be published next week, we will address the question what being ‘highly flexible’ really means in practice.