The reasons behind this are myriad, but include the perception that the Federal Reserve may be making a policy mistake, or that interest rate policy needs a nod towards normality. Either way, it means that just as the sovereign bond relationship to interest rate rises may be broken, so – for different reasons – may be the equity market relationship.
Bill McQuaker, head of the multi-manager at Henderson Global Investors, says: “We still hold some exposure to gilts and treasuries and our central case is still that these remain a portfolio hedge. If rates were to rise significant, then the expected returns from government bonds would be noticeably worse, but the central banks have said that the pace of policy tightening will be unusually slow and careful.”
Harding is also clear that over the longer term, gilts will still act as a diversifier to equities, the short-term may be more complex to navigate. The impact of both the bond and equity market to a potential rise in interest rates is far from clear. Equally, the correlation between asset classes may become murky in a rising rate environment as well.
