A topic that sits at the top of the risks ledger for me, and one that I’ve been following for a while, is the lack of liquidity and valuation in the bond market. I first wrote about it last summer. As a follow up to that, I wanted to share an interesting article that the Financial Times recently published on large global asset managers undergoing “shock-tests” of their bond portfolios. The article cited that this strategy was “to ensure they are prepared for any sell-off caused by a financial shock.”
As I’m sure you are all aware, corrections can be violent when they are both unanticipated and contravene a crowded trade. The last 15 years have lulled fixed-income investors into a sense of complacency as interest rates have compressed and bond valuations expanded. We have not seen a rate tightening cycle of any great significance over that period. Given how strong the economic data is coming out of the U.S., there is also a very real chance that we may be staring at the early stages of a prolonged rate hike cycle directly in the face.
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