MURRAY: I believe that one of the biggest challenges facing the investment community over the next few years will be how to invest in a world of rising bond yields. For most of the past thirty years (post Volker) we have lived in a world of steadily falling government bond yields. Thanks to this, government bonds have provided two useful benefits to investors from a portfolio construction perspective. First, during periods of normal market action when risk assets are generally in a rising trend, albeit one which may be volatile, government bonds provided a small positive real return. It was therefore possible to select an appropriate balance between risky assets and government bonds to suit an investor's desired risk profile. This was not a science and it did not work all the time but as a general modus operandi it worked reasonably well. Secondly, government bonds rallied hard during periods of market stress when risk assets sold off aggressively.
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