If the Federal Reserve follows through on its plan to hike rates three times over the course of 2018, investors at the long-end of the yield curve could be stung badly.
That is the view of Lukas Daaldar, chief investment officer for Robeco’s Investment Solutions, who also oversees the multi-asset portfolio managers and strategists.
Daaldar, who recently told Citywire Selector that German bunds currently looked ‘ridiculous’, said that fixed income investors are rightly focused on the Fed and the Bank of England as the central banks setting the pace on developed world rate hikes.
‘If you look at the whole then there is one country or two, England and the US, with a real rate hike cycle. So far you can clearly see that the rate hikes have not had any real impact on the markets, but from the moment they start I think there is 10bps difference in the 10-year yield, so it has become a flatter yield.
‘The Fed has become quite good at telling the market what it is going to do without upsetting it too much. At some point, you'll get to a squeeze and the 10-year will probably start to move as well.
‘If I look at what is expected now in the market, people are questioning the three rate hikes the Fed is expecting for 2018. If that is indeed still forthcoming, I would say the longer-dated yields are indeed vulnerable.’
With the need to find new ideas clearly apparent, Daaldar said he has noticed a push into illiquid markets for yielding plays. However, he is wary of crowded trading in areas with limited ability to pull out quickly.
‘Illiquidity has been a theme, especially if we listen to clients in the Netherlands. We prefer to get a premium for that, and I do agree with the longer-term assessment with that. On the other hand, if everyone starts to buy illiquids then the premium is gone as well.
‘I think if you look for alternatives you should stay closer to home. If you don’t like German bonds, for example, you should try to see whether you can get yield from US bonds. If that is still not enough then you can add some risk and go for credits, high yield or even EMD.’