ABN AMRO MeesPierson: ‘Make your bond portfolios less interest-sensitive’

Press release -

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ABN AMRO MeesPierson advises investors to reduce the interest-sensitivity (duration) of their bond portfolios. The private bank gives this advice in light of the potential negative impact of the interest rate hikes by the US Federal Reserve (Fed). Since higher interest rates mean higher bond yields, this would depress the prices of bonds, which have an inverse relation to yields.

As expected, last Wednesday the Fed decided to raise its policy interest rate by 0.25%. The central bank of the United States also provided further details about its decision to reduce its balance sheet position. According to ABN AMRO, Wednesday’s decision to raise interest shows that the Fed remains committed to its mission of normalisation: to raise short-term rates to more usual levels.

Opportunities in corporate bonds

ABN AMRO MeesPierson’s head of Bond Investments Mary Pieterse-Bloem comments, 'The good news about the Fed’s interest normalisation is that it’s growth-driven. In other words, it has its basis in economic growth. As such, we see investment opportunities in corporate bonds – specifically bonds of companies that are benefiting from the economic recovery.'

Poor macro data only temporary

The Fed had already primed the markets before it decided to raise its interest rates. Pieterse-Bloem understands the economic reasons for the rate hike: 'Despite the disappointing job figures announced recently, overall the US labour market is performing excellently. We believe that the current poor macro data are only temporary and offer no reason for concern. This view is shared by the Fed.'

Inflation falls short of targets

Matters are less clear-cut with inflation, ABN AMRO feels. Pieterse-Bloem adds, 'We could be in a phase where inflation is structurally lower than it was previously. According to our economists, a structural drop in inflation might be caused by digitalisation that’s depressing prices in the services sector. That would explain why inflation continues to fall short of the targets set by central banks, both in the US and in Europe. However, so far low inflation has not stopped the Federal Reserve from raising its interest rates.'

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