Implications on Portfolio Management with a new paradigm in Fixed Income Markets
Lombard Odier Investment Management recently brought it to the point in its research piece stating the following:
For more than 30 years, traditional bond investment strategies have been benefitting from falling interest rates. currently we are witnessing a historically low/negative yielding environment coupled with rising market risk in portfolios alongside a deeply fractured liquidity setting.
We believe that the current status-quo of fixed income investing is wholly ill-equipped to deal with these new realities.
In our view, investors need to rethink fixed income investing in order to mitigate today’s challenges and embrace a new paradigm of bond investing focussed on trading less and quality.
Some of my conclusions I do like to share (some mentioned in the research piece of LOIM, some I added):
– Portfolio construction is much more important, have building blocks to put allocation together
– Consider fundamentals-driven portfolio construction with limited turnover
– Rather accept illiquidity and cash in its premium if quality fits, listed bonds are not liquid anymore neither these days
– Stay in good quality names with low default probability, maybe choose next lower capital structure to get higher yield
– For non mainstream bonds or products, do involve specialists being closer to the markets, it has gotten more demanding.