In this roundtable discussion, Nick Maroutsos, Dan Siluk and Jason England, portfolio managers on the Absolute Return Income strategy, talk candidly about matters affecting markets and how these are influencing their investment decisions. The video discusses three topics:
- Asset allocation in light of more accommodative monetary policy
- How to deal with a more politically driven economy
- How to generate income in a negative rate environment
Cross-currency hedging effect: Differences between interest rates between two currencies and the relative demand for currencies at a particular point in time mean the currency hedging cost can be a cost or a profit depending on which direction an investor is buying a foreign asset. Currently, for example, it is possible after hedging for a US dollar-based investor to earn additional yield on a euro-denominated bond.
Roll down. If you buy a longer-term bond and the yield curve has a normal upward slope, the market price of a bond increases as the bond rolls down the yield curve. For example, imagine buying a 2-year bond, paying a 3% coupon with a 3% yield – the bond is priced at face value of 100. After a year, you effectively own a 1-year bond. If rates have not changed, the market yield on a 1-year bond should be lower because it is a shorter-term bond. Your bond still pays 3% but the market yield for a 1-year bond is say 2%. An investor would be prepared to pay 101 for your bond. The bond has gained value as it rolled down the yield curve.