Money managers investing in European fixed income are taking shorter duration bets to protect against impending capital losses in the continued low-interest-rate environment.
Sources said the conversation has moved on from generating yield, and instead is focused on mitigating the greater risk of losses to principal. With yields at record lows, indeed, some German and Dutch government bonds offer no yield at all, investors are applying flexible fixed-income strategies or allocating to cash or corporate credit to reduce volatility in the portfolio.
“Coupon protection is not existing anymore,” according to Mauro Vittorangeli, chief investment officer, conviction fixed income, at Allianz Global Investors, based in Paris.
The Allianz Flexible Bond Strategy, which Mr. Vittorangeli manages, has e1.1 billion ($1.2 billion).
Stephan Hirschbrich, head of global rates at Union Investment, based in Frankfurt, agreed that “because of the low yield level, there is no buffer for the interest rate due to (the) coupon.” Union has e50 billion in total fixed income.
The U.K. gilt index is now 12 years in duration, which means that if interest rates increase only 1% this will tally to a -12% loss in value, Mr.Vittorangeli said.
By comparison, the duration for the eurozone bond index is seven years, which means that on every increase in yield by 100 basis points, investors lose 7% on the value of the security, Mr. Hirschbrich said.