More pointed duration exposure needed – State Street

Added 2nd November 2016

Duration may have been the main driver of portfolio growth in 2016 so far, says State Street Global Advisers, but the next leg may require investors to have a more pointed exposure.

More pointed duration exposure needed – State Street

In a note out on Wednesday, Antoine Lesne, Tapiwa Ngwena and Rebeca Chesworth argue that with deflation threats fading into the background as markets increasingly focus on recent economic and inflation figures (next week’s US election notwithstanding) there is the possibility for a steepening of the curves.

“After two years of downside inflation surprises, the deflation threat seems to be easing, pushing break-evens higher. US 10-year break-evens trade around 1.73% (at the time of writing) while euro equivalents are at 1.07%,” it said.

Despite this increase seen in treasury yield, however, it said, spreads have continued to tighten in sterling, US dollar and euro corporate indices. Adding, in such a context, a more pointed duration exposure is required to manage interest rate risk.

“The Barclays US Corporate 3-10 Year Index currently has a duration of circa 5.3 vs. 8.4 in an all maturity index like the iBoxx US$ Liquid Corporate Index. In the past 10 years the duration of the Barclays All Maturity IG Corporate Index has been extended by 1.5, from 6 to 7.5. The case for controlling duration thus becomes natural,” the trio said.

Adding: “Maturity-based indices offer this opportunity to investors to more precisely adjust their portfolio.”

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Geoff Candy

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Geoff Candy joined Portfolio Adviser as News Editor in May 2014. He has been a financial journalist and broadcaster since 2005 and, in that time has worked in both South Africa and the Netherlands, covering everything from high street retailers and construction companies to mining and insurance.

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