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The challenge of maintaining fixed-income returns as interest rates rise

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I think that people have lost their understanding of the different risk/return profiles of bought and held bonds and unitized bond (aka so-called “fixed income”) funds.

The former is a fairly simple matter of assessing return adequacy relative to default risk to the maturity date.

So many investors mismatch their income timing requirements to the wrong F.I. funds, institutional investors included, that capital losses are common.

Investors in these funds also need to take other risk factors into account these days, such as trader smarts and central banker behaviours, QE being just one example of massive market intervention to influence yields.

Inflation is less a correlate these days than these policy-induced behaviours. Even though the probability of the U.S. or the E.U. dumping all those bonds on the open market is close to zero, can anyone deny that the effect on existing unit holders (as opposed to the buyers and holders) would be the evaporation of capital when it might be needed most?

Wednesday, August 16 at 1:50 pm | Reply

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