In an article about the popularity of safe government bonds in Fondsnieuws, Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed Income in the Global Investment Center of the Private Bank of ABN AMRO, shares her vision on bond investments.
According to Mary Pieterse Bloem, the interest rate is rising again in the core countries of Europe. 'This is because we think that the current economic weakness is only temporary. Investors also show more risk avers behaviour, which can be explained by the commotion in many emerging countries. This has led to a reduction of bond purchases, which leads to upwards pressure on the interest rate. The interest rates are still extremly low, so the impact of the first increases will be significant', says Mary Pieterse Bloem.
Because of the low interest rate, bonds form a too small part of the investment portfolio's of banks and this has been the case for a while. Within the category of bonds, the government bonds represent an even smaller fraction. The bank does try to respond quickly to changes in the expectations about the interest rate. In order to do so, they follow an active 'duration strategy': when interest rates rise, the bank reduces the duration in order to prevent exchange losses. Moreover, the bank has also included an inflation-indexed bond in their portfolio, because it is believed that the market underestimates the risk of inflation within the eurozone.