Pension funds offer ‘controversial’ yield view

Wheat fieldUK and Irish pension funds do not expect bond yields to rise dramatically in the next 12 months, meaning they are not taking action to protect their portfolios should interest rates go up, a survey indicates.

Pioneer Investments, the asset manager that carried out the survey of over 50 funds, says the finding is “controversial” because yields rose by as much as 1% in 2013, meaning bond prices fell, potentially reducing returns.

The direction of interest rates has caused much debate in recent months. Although the mantra “lower for longer” has been used, a number of fund managers have advised investors to opt for short duration bonds or floating rates as a hedge against rising bank rates.

Respondents to the Pioneer survey say they expect yields to rise in the second half of 2015 when they believe the Bank of England (BoE) will increase the overnight lending rate.

But Pioneer warns that funds may be failing to take into account the market’s ability to price in the rise before the BoE acts.

Forty-five per cent of the respondents have no plans to allocate to strategies that might protect them in a rising-rate environment. A 1% rise in yields could lose a typical UK pension fund up to 11% of fixed income capital as bond prices fall, says Pioneer, adding that asset managers have a role to play in helping investors protect their assets.

The survey shows that the “lower for longer” view prevails, says Pioneer.

Andreas Utermann, the global chief investment officer at Allianz Global Investors, said in a market outlook in January: “We are still in the post-financial crisis environment in terms of macroeconomic policy and that means we will see low real or nominal interest rates for longer than the market anticipates.” However, he did not rule out at least slight rate rises.

Todd Youngberg, head of high yield at Aviva Investors, warns that rising US treasury rates in 2014 could impact the global high yield bond market.

He says: “Yields on high yield bonds have been on a declining trend and are now below historical highs. The global high yield bond market started 2013 at a yield-to-worst of 6.13% and on 31 January 2014 the yield-to worst was 5.34%.”

He says investors with a lower risk tolerance and the flexibility to invest in short duration global high yield bonds and bank loans, should consider doing so.

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