February 2022 / GLOBAL FIXED INCOME

Helping Global Bond Investors When Duration Fails

Strategies to reduce potential duration-led losses.

Joran Laird, Portfolio Specialist

Key insights

Global bond investors could face significant risks from rising yields in 2022 and long duration portfolio holdings. Many seek ways to mitigate these risks.
Our studies suggests lowering duration on government bond portfolios to around two years may significantly reduce or even prevent losses from rising yields.
An alternative option would be to adopt an unconstrained global bond portfolio, giving the manager full discretion over both country and duration strategy.

Many fixed income investors have been asking about the implications of rising interest rates, especially now that markets are beginning to discount the first rate hikes by the U.S. Federal Reserve earlier than had seemed likely a few months ago. While the Fed initially saw the emergence of post coronavirus pandemic inflation as transitory, the increase in prices has been far more persistent than they had earlier hoped for. This led Fed Chair Jerome Powell recently to say it was time to retire the term “transitory” as a description of current inflation. Even if inflation falls back to 3% to 4% per cent, it may be a long time before it is back at the Fed’s 2% per cent target.

In the current environment, index-aware global bond investors face significant risks posed by a combination of rising market yields in 2022 and long duration portfolio holdings. They have become increasingly concerned over their exposure to rising rates, how quickly rates will rise, and just how large the potential drawdown on a portfolio of global government bonds might be. In this Insights note, we try to address some of these key concerns, in particular what can be done to mitigate the risks from rising rates.

In this Insights note, we try to address... what can be done to mitigate the risks from rising rates.

We believe that one possible solution is for investors to take steps to mitigate potential duration-led losses ahead of any major upward move in yields. To succeed in this, decisive action will be required by asset owners to ensure that their fixed income managers have the flexibility they need to manage duration risk more aggressively in the elevated inflation, rising yield environment that beckons in 2022.

See the full report (PDF).

Fixed Income General Risk

Capital risk—the value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different.

ESG and Sustainability risk—May result in a material negative impact on the value of an investment and performance of the portfolio.

Counterparty risk—an entity with which the portfolio transacts may not meet its obligations to the portfolio.

Geographic concentration risk—to the extent that a portfolio invests a large portion of its assets in a particular geographic area, its performance will be more strongly affected by events within that area.

Hedging risk—a portfolio’s attempts to reduce or eliminate certain risks through hedging may not work as intended.

Investment portfolio risk—investing in portfolios involves certain risks an investor would not face if investing in markets directly.

Management risk—the investment manager or its designees may at times find their obligations to a portfolio to be in conflict with their obligations to other investment portfolios they manage (although in such cases, all portfolios will be dealt with equitably).

Operational risk—operational failures could lead to disruptions of portfolio operations or financial losses.

Additional Disclosures

“Bloomberg®”, Bloomberg Global Treasury and Bloomberg US Treasury Index are service marks of Bloomberg Finance L.P. and its affiliates,including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by T. Rowe Price. Bloomberg is not affiliated with T. Rowe Price, and Bloomberg does not approve, endorse, review, or recommend its products. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to its products.

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