Fixed income in a rising rate environment, August 2015

Funds Management

by Carolyn Herbert

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Transcription of Finance News Network Interview with Antares Fixed Income Manager, Tano Pelosi
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Antares Fixed Income is Tano Pelosi. Tano, welcome back to FNN.
Tano Pelosi: Thank you for having me.
Lelde Smits: Now you are one of the Managers at Antares Fixed Income. What kind of products do you cover?
Tano Pelosi: Antares covers the whole gamut of Australian dollar fixed income, in the whole spectrum. Everything from cash to credit, to longer dated securities such as inflationary bonds, we also customise tailored solutions for certain clients. And more recently we’ve launched a retail product, the Income Fund.
Lelde Smits: What is the appetite for fixed interest products in today’s low interest rate environment?
Tano Pelosi: We continue to see strong interest in fixed interest, excuse the puns. But essentially, investors are still seeking diversified investments, regular solid income and supported by good credit quality, and liquidity. And that’s what’s being offered, particularlyAntares Income Fund.
Lelde Smits: How much have key benchmark rates moved over the last quarter?
Tano Pelosi: Over the quarter, we saw about a 70 basis point move in the ten-year bond rate, following similar moves in the European markets and to a lesser extent, in the US market. The yield curve itself saw quite a significant steepening, particularly as a term premia was restored to the market. And there was some, I guess, more pronounced concerns about inflation. So hence more inflation term premia being built into the curves. So the yield curve’s steepened up over the quarter.
Lelde Smits: What do you believe the yield curve is telling us about the next six to 12 months?
Tano Pelosi: The yield curve has been basically telling us that the trajectory, of rate rises from the Fed will be slow and gradual. There is some debate about where the terminal cash rate will rest. The other thing is, we’re seeing that the curve is suggesting that the inflation risk, is not a particularly prevalent risk at this point. Hence the curve could be much steeper.
Lelde Smits: Has this had any impact on the composition of your portfolios?
Tano Pelosi: Essentially we haven’t tried to be too reactive to the recent movements. The other thing to bear in mind is that a lot of the supply risk that’s coming though via the Government issuance, is also promoting a steeper yield curve over time. So we’re very mindful of that. There are value points along the curve, which sees us take exposure in the longer part of bond curves. But generally speaking, the overall composition of the portfolios hasn’t shifted that much.
Lelde Smits: Finally Tano. What are the implications for fixed income fund managers if rates don’t increase later this year?
Tano Pelosi: If rates were not to increase this year, even if the Fed was not to engage in lift-off, that would have certain implications. Firstly it would imply that something more sinister is happening in terms of the global economy, potential deflation risks playing out again. It would raise some serious questions over the trajectory, of at least US inflation and their growth.
So if we were looking at a scenario where rates will be rising in 2016 rather than 2015, it would suggest that the global growth outlook was looking a lot more negative, than what’s initially sort of being priced in.
Lelde Smits: Tano Pelosi, thank you for the update from Antares Fixed Income.
Tano Pelosi: It’s a pleasure.


Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.