Asset owners are growing increasingly skeptical of bond managers’ ability to navigate a rising interest rate environment, according to research by NN Investment Partners (NNIP).
The Dutch asset management house found that only 3% of 105 institutions surveyed had “complete confidence” in their fund managers’ abilities to cope with the expected tightening of monetary policy by the US Federal Reserve.
More than half of respondents said they expected several managers to struggle with the environment, while 6% said they had “no confidence at all” in bond investors’ ability to cope.
Those asset owners that were skeptical of managers’ prospects cited a lack of experience of this stage of the credit cycle as a key reason for their concern. Some also warned that fund managers lacked experience of a rising rate environment—the Fed has not raised its core interest rate since 2006, and it has been at an all-time low of 0.25% since December 2008.
Sylvain de Ruijter, head of global fixed income at NNIP, said the next policy tightening cycle “may well be very different from earlier cycles, something that few fund managers have experienced”.
Investors have been pulling money out of fixed income products in recent months. According to Lipper’s monthly fund flows data, in September investors pulled more than €4 billion ($4.4 billion) from European corporate bond funds, while there were also significant outflows from global bond, emerging market bond, and high yield bond funds by European investors.
Analysis from Standard Life Investments published in September warned of “numerous, complex, and in some cases, unprecedented” factors weighing on bond markets.
The asset manager’s data echoed the forecasts of many fixed income and economic commentators, suggesting that US 10-year treasury bond yields would likely peak at “3% to 4%”—above the current ultra-low levels but “well below the peak of previous business cycles.”
Related: The Benchmark Causing Headaches for High Yield Investors & Why Bond Yields Are Lower for Younger