A third of IFAs think it will be two years before interest rates rise, survey shows

News - Banking

Written by Ray Clancy

Thursday, 18 February 2010 09:22

One in three independent financial advisors don’t expect the Bank of England base rate to rise for a year, according to a survey.

A further one in ten expects it to take two years before interest rates rise the poll conducted at the recent ABC of Bonds Roadshow held by AXA Investment Managers, Baring Asset Management and Cazenove Capital.

It also found that only 6% anticipate the base rate will increase during the first quarter of 2010, with one in four expecting it to take six months before there is a rise.

The survey was carried out because interest rate risk is a major threat to bondholders. If the rate rises, bond prices will fall because the opportunity cost of holding a bond rises as investors can switch to other investments that reflect the higher interest rate and offer more attractive returns.

Also rising interest rates and a more volatile bond market are likely to result in an even greater shift to those fixed income managers with a strong track record.

‘As fourth quarter GDP data showed the UK economy only barely emerging from recession, it is not surprising that a high number of IFA’s surveyed do not see any imminent rise in UK rates,’ said Theodora Zemek of AXA Sterling Corporate Bond Fund.

‘The Bank of England monitors growth data but is also aware that inflation data continues to surprise on the upside, even before the VAT rate rise in January. However we believe that fiscal policy after the election will also be a major influence on the Bank’s decision to raise interest rates, so on balance we would expect the first rate rise in the second half of this year,’ he added.

Colin Harte, manager of the Baring Absolute Return Global Bond Trust said he believes a rise will come sooner. ‘It is interesting to see that as many as 10% of the IFAs surveyed believe it could be two years before we see a Bank of England rate increase. Our expectation is that the increases will begin sooner, possibly by the end of this year,’ he said.

‘Should we enter an environment where there are no rate increases for the next two years, the risk is that the Bank of England will lose credibility and inflation expectations become unanchored, with the implication that bond yields could rise significantly. When considering these risks, it is understandable that 57% of IFAs plan to recommend absolute return bond funds to their clients in 2010,’ he added.

According to Robert Thorpe, Director of UK Advisory Sales at Cazenove Capital, said he believes that most advisers are in fact concerned that rates will rise in the next 12 months. ‘Recent inflation figures will reinforce this view that is leading advisers to focus on duration and those funds with low duration are now starting to dominate advisers buy lists,’ he claimed.

‘Our experience is this is also leading to a greater number of advisers seeking managers who have a flexible mandate allowing them to play both the credit spectrum and yield curve,’ he added.