Despite the prospect of rising interest rates, investors should not disregard the capital protection provided by bonds, says Capital Group.
In its 2015 Investment Insights report, Capital Group said investors shouldn’t overlook the benefits of bonds in higher interest rate markets, especially as bonds can mitigate loses in market downturns.
“Rising rates should not dissuade investors from participating in the fixed-income markets,” the report from Capital Group said.
“Bonds are an important diversification tool that should help mitigate losses during stock market downturns and periods of economic uncertainty,” the report said.
The investment manager also pointed out that in 2015 it expects more headwinds than tailwinds which will result in a volatile bond market, particularly as the US moves to tighten monetary policy.
“Low interest rates and tightening credit spreads provided support for bond prices in 2014,” the report said. “That could change if the Fed raises interest rates for the first time since 2006.”
“Rates are likely to move higher, though perhaps not as high or as fast as many investors expect. While the US economy appears to be strengthening, signs of slowing growth in Asia and Europe could keep rates from climbing too fast,” it said.
Capital Group also said emerging market bond yields continue to offer relatively attractive valuations against a “backdrop of prevailingly low interest rates” and accommodative central bank policies in developed markets.
“Broadly, bond market sentiment appears more favourable in countries where governments are adopting supportive longer-term economic and fiscal policies, and geopolitical risk is less evident,” the report said.
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