Passive global bond investors may be getting more than they bargained for—in terms of risk, that is. That’s because lower-yielding debt is overrepresented in the benchmark, providing less buffer—and passive investing locks other types of risk into the portfolio.
In this month’s Global Economic Perspective, Franklin Templeton Fixed Income Group weighs in on the factors spurring the US Fed’s decision to raise rates, why the ECB’s Draghi is likely to resist calls to adopt a more hawkish line, and why the backdrop for emerging markets has improved.
Unorthodox monetary policies, low and negative interest rates, and other factors such as aging demographics have led to an ongoing hunt for yield. The result has brought even risk-averse investors further and further out on the risk spectrum. This paper, Adjusting to a sustained low-yield environment examines the issues.
For all that political events and speculation about policy direction have dominated news cycles over recent months, the US economy’s key fundamentals have changed remarkably little, in our view. The backdrop appears to us to be constructive, as a healthy level of consumer spending has been increasingly reinforced by a recovery in corporate earnings and investment.
Looking for a strong defense against rising US interest rates? Look no further.
While heartened by the bounce in oil prices after the multi-decade lows reached early in the year, any significant further rally in energy prices would seem to us to require a far more vibrant global economy. As the IMF’s (and the Fed’s) relatively subdued outlooks make clear, it is hard to anticipate such a scenario occurring anytime soon.