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Wednesday, May 08, 2013

Schroders' Dasher Warns of Negative Rates

Reported by Tommy Fernandez

If you really need some shuteye, Schroders' [profile] Karl Dasher recommends you read the tome History of Interest Rates.

"If you ever want to read anything to put you to sleep, read that," quipped Dasher, the global firm's head of fixed income, as well as chief executive of its U.S. arm.

He made these comments during a media event, Targeting Global Opportunities hosted by Schroders in Manhattan at Le Parker Meridien Hotel.

The tome, while narcoleptic, helps Dasher get perspective on the bond markets, in particular the 30 year boom the U.S. market has enjoyed, and investors have taken for granted.

This boom, Dasher argues, was not normal. In fact, investors should prepare for some tough times ahead in the fixed income space.

"What we have experienced in the past thirty years was much more the anomaly," he said. "In the U.S. since the Civil War, there were extended periods of time when bonds had negative rates in real environments."

"It is mathematically impossible to have the run we've had over the past 30 years," he put it in another way.

Globally, there is even a possibility that European Central Banks could push their rates into negative territory to push companies to use their cash, according to colleague Keith Wade, Schroders' chief economist, during a previous session.

What does this mean for investors and managers? They'll have to work a lot harder.

In the past, Dasher said, investors just had to make sure they didn't trade themselves out of a rally.

Now, they'll have to be much more unconstrained and more nimble. Going forward, they'll have to look deeper into the financials of corporate debt issuers to make sure leveraging and financial engineering aren't undermining the companies. Dasher said that companies will experience growing pressure to polish their balances over the next year or so and that can lead to idiosyncratic risk in portfolios.

"Going forward, you are going to have to pull a lot of levers just get a bit of return," he said. 

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