Bandon Capital Management has released a research paper examining the risks of the current low interest rate environment and the challenges of a prolonged low or rising interest rate future for fixed income investors.

“Fixed Income Investing – the Dangers of Complacency” points out the US has been in a declining interest rate environment for 30 years, producing a tailwind for fixed income investors but one with little room left for further decline. 

At these interest rate levels - the yield on the 10 year US Treasury recently hit an all-time month end low of 1.49 per cent - fixed income investors face unique risks which are predominantly unfamiliar.
 
However, given the recent attractive returns and the flight to safety associated with the fragile global economic environment, money has poured into fixed income mutual funds – USD740bn from 2009 through 2011, more than 15 times the amount that was invested between 2000 and 2008 (USD47bn).
 
“We repeatedly see investors equating fixed income investments with safety which we think is misplaced,” says Bill Woodruff (pictured), Bandon’s chief investment officer. “Like equity markets, bond markets generally do not shift gradually. With markets pricing in what seems like everlasting low growth and Fed easing, even some slight economic optimism may create increasing rates much sooner or faster than the market expects.”