Bond volatility provides de-risking opportunity

PensionandkeyTrustees are urged to remain focused on balance sheets even as rising bond yields alleviate pressure on underfunded pension schemes.

David Rae, a liability-driven investment (LDI) solutions leader at Russell Investments, says that trustees should be prepared for rising yields and bond volatility.

When this happens, trustees should wind down leverage within the scheme balance sheet and keep some cash in reserve for possible reinvestment as more attractive valuations appear, Rae says, and warns that rising yields are still unlikely to retrace all their gains.

Volatility in interest rate markets is going to remain elevated as monetary policy diverges, according to Rae.

Rae, who heads LDI solutions in Europe, Middle East and Africa, notes that whereas newspaper headlines in the UK tend to focus on the 10-year gilt yield, most pension funds have longer dated inflation-linked liabilities, which tend to be less impacted by global factors and more by domestic factors.

Ten-year gilts have risen by around 50 basis points over the last six weeks.

“The higher volatility in bond markets and other markets is an opportunity and the answer in this environment is to be prepared,” says Rae.

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