When thinking about the exposure to duration and credit in your client’s portfolios, there are a number of factors to consider aside from valuation. In this piece we explore how Floating Rate Notes can complement duration within a portfolio.
The current environment is a challenging one for Asset Allocators. Whilst inflation numbers have peaked in the US, other parts of the globe are still experiencing inflation levels that haven’t been seen in decades.
Central banks remain hawkish and the risk of policy misstep is increasing. This begs the question – is now the right time to increase duration given that the risks of a recession are increasing? And how should we think about duration given that stocks and bonds have moved with positive correlation over the last year? Will this continue through 2023?
Whilst most would agree that the relative attractiveness of duration has improved, the return journey for bond investors is unlikely to be a smooth one for the simple fact that a 30 year bond bull market cannot be unwound over a 12 month period.
We’ve also seen more noise and uncertainty in markets driven by a shift from central bank monetary policy synchronization, to more divergent policy settings to manage local inflation conditions.
When thinking about the exposure to duration and credit in your client’s portfolios, there are a number of factors to consider aside from valuation. In this piece we explore this further but remain strong advocates of Bank issued Floating Rate Notes.
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Floating rate securities are often lower-quality debt securities and may involve greater risk of price changes and greater risk of default on interest and principal payments. The market for floating rate securities is largely unregulated and these assets usually do not trade on an organized exchange. As a result, floating rate bank loans can be relatively illiquid and hard to value. Diversification does not ensure a profit or guarantee against loss.
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