Fixed On Bonds

Premier Miton's Bond Blog

THINKING AHEAD OF THE CURVE

Safety and return at the very short end

2 March 2022

When we talk about the short end we are not talking about the stature of this fund’s manager, although I am only 5ft high (or for those that prefer metric 152cm)! We are talking about the short end of the yield curve – those fixed income securities with short maturities and hence negligible price risk from movements in interest rates. Indeed, in our money market fund (Premier Miton UK Money Market Fund), we are talking very short maturities – those with less than a year to maturity and in many cases much less. Our fund has a weighted average life of just 102 days.

Markets of all descriptions have had an incredible run over the last few years and investors are getting wary of holding on to more risky assets that have provided them with so many gains, especially given that central banks around the world are keen to start raising interest rates and also reduce the size of their balance sheets. This week the Fed minutes signalled that balance sheet reduction was of utmost importance, and reduction will take place at a more rapid pace than previously. We know what this means for more risky assets – equities are highly correlated to the size of these balance sheets and a reduction in balance sheet size could spell danger.

Source: Bloomberg, 31.12.1992 – 31.12.2021.

Cash is king

Fortunately for us as money market managers, the market has moved swiftly at the short end of the yield curve to price in rate hikes. For example, in the UK the market has moved to price in a whopping 5 hikes from now until the end of the year. With a highly liquid maturity profile in the fund (16.8% maturing overnight, 21.1% in 1 week and 35.9% in 1 month), we are able to take advantage of this rapidly changing market pricing. For example we’ve been able to source very short dated, high quality corporate bonds such as single A rated BMW at over 1.2% for 5 months as well as single A rated Honda at over 1% with just over 6 weeks to maturity! We also topped up our position in Wells Fargo with less than 3 months to maturity at over 1%.

Short is back!

In short (excuse the pun), whatever the worry as an investor, whether it is liquidity withdrawal from central banks through balance sheet reduction, or the potential for WWIII, or simply a place to park cash from all those gains over the last few years, the short end is back! Offering safety and now return, given so many rate increases have been priced in by the markets.

Risks

The value of stock market investments will fluctuate and investors may not get back the original amount invested. Reference to any particular stock does not constitute a recommendation to buy or sell the investment.

Past performance is not a reliable indicator of future returns.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

Higher inflation can lead to some investments falling in value, particularly those with a fixed level of interest, for example government bonds and corporate bonds.

Changes in central bank interest rates can affect all types of assets, in particular, securities such as government bonds and corporate bonds that generally offer a fixed level of interest. If interest rates go up, the value of a bond may fall, and vice versa.

Future forecasts are not reliable indicators of future returns.

Sign up to receive the bond blog straight to your inbox

Recent posts

Is the world ready for this?

Simon Prior and Lloyd Harris 8 November 2024

US election positioning – we could get fireworks!

Lloyd Harris 17 October 2024

If Thames Water is preparing for “huge” debt restructuring, is Southern Water going to be next?

Lloyd Harris 25 September 2024

Important information

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

A free, English language copy of the fund’s full prospectus, the Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

Financial Promotion is issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

005893/010322