Bonds – Defensive but with flexibility

Markets endured a dramatic round-trip over the quarter, revealing the inherent volatility of an unstable relationship between markets and central banks. The January and February weakness in equities and credit was partly caused by fears that central banks were either creating instability (for example as bank profits are crimped by negative rates) or they had simply ‘run out of bullets’. The dovish responses in March from both the ECB (further easing) and the Fed (cautious communication and a more subdued outlook) were acknowledgement by each that there is a feedback loop between markets and policy. In Fixed Income we’ve been vocal about our views on indices as inappropriate yardsticks of risk for some time (VIEW LINK). As such, our portfolios, designed to be defensive in both an equity-relative and absolute sense, look quite different to valuation-agnostic benchmarks. With a significant underweight to duration risk, only moderate credit exposure and high effective cash weight we are well positioned to continue to provide defensive absolute outcomes. We discuss our current views further in “The Fix: Defensive but flexible” (VIEW LINK)