When yields rise, fixed income investors typically focus on the threat of capital loss. Are there other factors to consider? Rachel Baxter interviews Paul Malloy, head of fixed income, Vanguard Europe.
Watch the video (external link)
When yields rise, capital values fall, but rising yields also bring benefits to fixed income investors.
Important characteristics of fixed income are the coupon payments and redemption payments. As yields rise, investors will be able to reinvest those payments at higher yields and then realise that higher yield over their longer term investment horizon.
Another aspect of fixed income is its ability to reduce volatility in a portfolio.
Generally speaking, the outright level of yield and the portfolio dampening characteristics of fixed income are broadly independent of one another, so investors will be able to benefit from the diversification benefits as well as get the additional yield associated with the rise in yields over the term of the investment.
Some investors may see a decline in capital values in the shorter to medium-term, but rising yields will also bring benefits to investors looking to bonds for income and longer-term capital protection.
Watch the full video on Vanguard’s website. Read more about fixed income in a balanced investment strategy. Or contact Vanguard about fixed income workshops, where you can discuss in-depth tactical and strategic responses that a bond investor should consider. Worth ninety minutes towards your 2017 CPD. To sign up, email firstname.lastname@example.org or call 0800 917 5508.