Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall, and here today to give his three bond tips is Ian Winship, manager of the BlackRock Absolute Return Bond Fund.
Hello, Ian.
Ian Winship: Hello.
Wall: So, you are here today to talk about three bond themes with sort of overview of from the Central Bank and how that influences your selection on you. So, do you want to start?
Winship: Of course, yeah. I think that Central Banks are absolutely key, even more key, now than they have been in the past with regards to determining market direction, and what I'm looking forward and we are looking forward at BlackRock and as far and the Central Banks to continue to seek to be as transparent as a possibly can. We're seeing already with Mr. Carney, who to be honest did surprise us a month or so ago with regards to Mansion House Speech where he seem to indicated that he disagree slightly with the timing of the first rate hike in the U.K., but what we're looking for is that sort of guidance.
The Central Banks do not want long bonds or yields with a longer maturity to basically rise quite sharply. We saw that last year and Mr. Bernanke last May in 2013, had what they called at taper tantrum on the basis to anti-U.S. tapering to the market, what that effectively did was that it doubled the 10 year rate in the U.S. and also in Europe from 1.5% to 3%. What that did to the economy is that, it slowed it down. So, they had to start again come September. So, I think the Central Banks are very keen whether it's a U.K. Bank of England or whether it's U.S. Federal Reserve not to repeat that mistake.
So, I think we've got lot more guidance. I think the Central Banks are very keen that the 10 year rate, for example, is set to trade within a fairly boring rate of maybe 2.5% to 3%. So, we will trade that range. So, you asked me about a trade, well, if the 10 year rate in Gilts actually got to 2.5% then we're trying to be short, and as we move towards 3%, I would go long. So I'm going to be trading the range and the major government markets over the next six months or so.
What that means for other fixed income assets classes? It's pretty good because if the Central Bank can control that range and if it doesn't overshoot then I think that's good for risk. So by that, I mean, it's good for credit, it's good for U.K. credit, it's good for U.S. credit, it's good for European credit, and even beyond that I'm looking to increase the allocation to high-yield and emerging markets.
So, essentially what I'm saying is that the Central Banks are looking to maintain this period of low volatility for the foreseeable future. And in terms of the portfolio, that means in terms of duration, trading the range, fairly tight range, but trading it nevertheless, but looking to take the opportunity to add to the credit exposure, add to high-yield and add to emerging markets.
Wall: And we can trust them can we, because Mark Carney's changed his mind a couple of times in the last year, forward guidance didn't exactly work and even Yellen's been a bit cheeky in what she's been saying. She said something a couple of months ago which indicated that may be interest rates would go up, may be they wouldn't.
Winship: Yeah.
Wall: So, taking them at face value?
Winship: Yeah. I've never liked forward guidance, but I think in fact what Mark Carney's done and what the rest of Bank of England have done is a pretty good job. Yellen I think has taken a lot a bit of time to get used to the position and specifically you say, these press conferences after the Fed meetings and I think she's doing a great job.
People know where Janet Yellen is with regards to – people know where the Fed is and I think the one – they want to let the economy trying to breathe. You know, we've come away from a time of crisis, as an unprecedented crisis in terms of financial system and in terms of how far we dropped in terms of the global economy and labour markets are – this is quite normal. We're getting back to normal. It's a nice word normal and we are getting back to it.
It's taken a little bit more time and we shouldn't get ahead of ourselves because the Central Banks aren't. So, I think that they will be the guide and I think that's going to give us an opportunity in fixed-income and this fund to make money over the next few months.
Wall: Ian, thank you very much.
Winship: No problem at all.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
