Bond investors face annual losses for only third time in 33 years

Bond investors face annual losses for only third time in 33 years

Only a “highly unlikely” fall in interest rates can prevent bond investors losing money over the course of 2013, BlackRock executive says.

The US Federal Reserve, chaired by Ben Bernanke, wants to stop buying bonds Photo: AP

By Richard Evans, Investment Editor

3:59PM BST 11 Sep 2013

Investors face losses on their bond holdings this year for only the third time in more than three decades, a senior expert in the field has said. Jeffrey Rosenberg, who is the chief investment strategist for fixed income at BlackRock, which manages bond investments worth $1.2 trillion or £750bn, said bond investors had lost 3.65pc so far this year and that “avoiding an annual loss will require a major shift lower in interest rates, something we do not expect”.The figure refers the change in the Barclays US Aggregate index or “Agg”, one of the most common benchmarks for company and government bonds. It fell by 0.86pc in the first week of September alone. Although the Agg is a US index, movements in the UK bond markets are unlikely to be greatly different.

Mr Rosenberg added: “An annual negative return in 2013 would represent only the third loss over the last 33 years. That loss highlights the rapidly changing dynamics for investing in fixed income.”

There has been a consensus for some time that bond prices have peaked. They were driven to unprecedented levels by investors seeking safe havens during the financial crisis. But now that economies are improving investors are prepared to take more risk in the hunt for higher yields; bond yields, which move in the opposite direction to prices, are very low by historical standards.

The fall in bond prices was accelerated by the announcement earlier this year that the US central bank planned to reduce or “taper” its programme of quantitative easing, which involves using newly created money to buy bonds. The withdrawal of a large buyer in any market tends to cause prices to fall.

Bill McQuaker, the head of multi-asset investing at Henderson Global Investors, said: “The only hope of a real positive return [for bond investors] is if inflation turns sharply lower and moves into negative territory or deflation. This of course, is possible, but has not happened since the 1920s and is something policymakers want to avoid as persistently falling prices can have adverse effects on profits, incomes and employment, among others.

“Circumstances are changing in ways that highlight this lack of value [in bonds]. Economies are showing more signs of recovery, making it harder to believe that deflation is around the corner, while price-insensitive buyers such as central banks are buying fewer bonds.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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