Interest rates to rise but no return to normal anytime soon

Speakers from BlackRock, Columbia Threadneedle and Insight Investments all forecast little prospect of a normalisation in interest rates over the next year at our annual conference.

Pent up demand from investors as central banks make large purchases of bonds means there will only be small rises in rates at best.

A raise in bond rates?

In the words of the chief macro strategist for multi-asset funds at BlackRock bond rates will only raise “a bit” over the next year, lagging behind a fiscal and cap-ex led boost to US equities.

Rupert Harrison cited the continued quantitative easing of the ECB and the Bank of Japan as the first reason, but also how low productivity growth and persistent excess unemployment in the EU.

“Japanese and European investors are getting terrible returns in their markets so they will buy US bonds thereby lowering yields,” he said. “It is going to take a lot of cyclical and trend recovery for bond rates to pick up anytime soon.”

Hedging

Rob Gall, head of market strategy at Insight Investments, was equally blunt about the demand and supply pressures on rates. With only 40 percent of £1.5 trillion of pension scheme liabilities hedged, he said there was £900 billion left to hedge with only around £30 billion being issued by the Bank of England each year.

Consumer debt

However, the case for a possible rise in UK rates was made by Toby Nangle, global head of asset-allocation at Columbia Threadneedle. He foresaw the possibility of the Bank of England acting to curtail a rise in consumer debt by the end of the year. Mark Carney, the governor of the Bank of England, has already signalled his concern at unsecured household debt growing at 10 percent per annum and if GDP figures are favourable a rise in rates could happen.

Government bonds

As a growth investor rather than a liability manager, Nangle has already cut his ties to government bonds, which he previously used to dampen the volatility of equities in his portfolio. “We think that game is probably over. We are going to see a higher level of correlation,” he predicted. He also attributed the excess demand for 10 year government bond yields as being the main determinant of yield in this market. “There are more DB liabilities than the entirety of the gilt and corporate bond market,” he said. “It’s not something I am investing in looking for a return.”

Matt shares his views on the economic outlook, understanding volatility and managing inflation risks in this short video.

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