Low rates and high risk. An almost unprecedented scenario that combines interest rates that have returned to the levels of the 40s with the duration of the bond indexes at the highest in the last thirty years. "There have never been such low returns for so much risk," said Bruno Rovelli, head of investment advisory Blackrock Italia, a few days ago during a conference at the investment giant's Milan office.
On the one hand, the entire rate structure collapsed downwards, returning to levels similar to the 40s and 50s, when average annual bond yields remained around 2% for about ten years: not only triple A but also high yields, which today yield around 6% on average, the same yield that triple A government bonds had at the beginning of 2000. On the other hand, the nature of bond indices has changed significantly over the last 30 years and today it has a duration at the highest level of the last thirty years: which means that a small movement in interest rates determines a strong price adjustment. Using the Barclays Global Aggregate as a reference, a 1% increase in the rate results in a 6% decrease in the price.
"Looking at a global bond index, today we find a yield to maturity that is at its lowest while duration is at its highest in the last 30 years - explained Bruno Rovelli - therefore we have the lowest level of interest rates for the highest financial risk" . A cocktail that does not promise to keep volatility low, which is therefore expected to increase. The yield structure has in fact compressed because the central banks, with their expansive policy, have encouraged risk-taking, but overall volatility is destined to increase, also in relation to events such as tapering, which in the future pushes towards 'prospective volatility is high, especially in the US. As with the dramatic sell-off last May-June triggered by the tapering announcement. "The real problem for bond investors, however, was not this sell-off - said Rovelli - the real problem is a long period of low yields that barely pay off inflation, we are in a sort of creeping bear market".
There are two opposing forces in the field today: on the one hand, the signs of recovery in the economic cycle, which push yields upwards, on the other, the central banks who want to keep them downwards to stimulate growth. According to BlackRock experts, in the medium term yields will eventually be pushed up by signs of recovery in the economic cycle but for the moment they will struggle to rise in the light of monetary policies which are expected to be expansive overall and globally also for 2014. this scenario the investment giant underlines that it is necessary to rethink the bond investment. Suffice it to say that today a yield of 5% can only be obtained if the portfolio duration is significantly lengthened and the quality of the issuers in terms of rating is reduced. And you should have exposure to high yield bonds at 80% of the portfolio. While ten years ago the same yield was obtained with high quality government bonds under three years of maturity. “Compared to what has been done in the past, it is necessary to be much more tactical and carefully manage the sensitivity of one's portfolio to interest rate trends - observes BlackRock - This is the reason why we believe it appropriate to start repositioning one's bond portfolio on products with broad management delegation, greater diversification and possibly low correlation compared to traditional bond indices”.
