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Bond Bear

A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall. This is known as interest rate risk. Maturity can also affect interest rate risk. The longer the bond’s maturity, the greater the risk that the bond’s value could be impacted by changing interest rates prior to maturity, which may have a negative effect on the price of the bond. 

Central banks make interest-rate adjustments to keep inflation within a target range for the health of economic activities or cap the interest rate concurrently with economic growth to safeguard economic momentum. Ultra-loose central bank monetary policies have driven bond yields to all-time lows. Ten-year yields have been declining for most of this decade, with German borrowing costs dipping below zero for the first time just before the middle of this year. However since July 2016, a reverse in this trend has occurred.  The yield on US government bonds with 10 years to mature rose by approximately 1% and suffered a price decline of almost 8%. This has happened for a number of reasons.

Firstly, the prospect of higher inflation, which erodes future bond income, typically drives yields higher. Yields began to rise in July following the release of strong results for US non-farm payrolls. This recovery in employment growth supported the view that a rate hike would take place in the US before the end of the year. 

Another contributing factor to rising yields is the belief that central banks are running out of room on the monetary stimulus front after 7 years of extraordinary measures, including numerous rounds of quantitative easing and forays into negative interest rate policy. In addition, central banks are weighing the benefits of QE against the cost of depressing long dated yields excessively. For example the Bank of Japan demonstrated a desire to steepen the yield curve, raising questions about its willingness to increase quantitative easing further. Speculation has increased that the ECB will taper its bond buying programme. In the meantime, the Federal Reserve has pointed towards a likely interest rate increase and the chance of a second rate cut in the UK has dropped significantly according to Bloomberg consensus data. Bond markets face the prospect of being slowly but surely unhooked from the life-support machine of inexhaustible central bank liquidity.

Yields have also risen due to the increased alertness to fiscal policy playing a more active role going forward in reflating the economy. Expectations that governments will adopt more reflationary policies have increased since the summer. In the US, discussions on the possibility of an easier fiscal policy are linked to the outcome of their Presidential election. 

Overall, those factors have combined to lift yields, particularly at the long end. Appian took measures in advance of this decline in bond prices to protect investment income while at the same time providing a diversified portfolio. Appian’s Value Fund and Ethical Value Fund are at the lower end of the range in terms of fixed income exposure and the existing fixed income component maintains a short duration of approximately 4 years leaving it less exposed to price decline during reflationary periods than funds with a longer overall duration. Furthermore, the funds have significant exposure to floating rate notes and inflation linked bonds whose price and coupon payments are linked to interest rate movement and inflation prices respectively.

The information contained in this material is not financial advice. Nor does it constitute an offer for the purchase or sale of any financial instruments, trading strategy, product or service. No one receiving this material should treat any of its contents as constituting advice. It does not take into account the investment objectives, knowledge, experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to investing or taking out any product from your own independent adviser.
This material has been prepared and issued by Appian Asset Management Limited on the basis of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been given to the preparation of the information, no warranties or representation, express or implied are given or liability accepted by Appian Asset Management Limited or its affiliates or any directors or employees in relation to the accuracy, fairness or completeness of the information contained herein. Any opinion expressed (including estimates and forecasts) may be subject to change without notice. 

If you decide to invest in the Appian Unit Trust, further information in relation to all risks is provided in the Fund Prospectus and supplements. This material is available from Appian Asset Management Limited, 42 Fitzwilliam Place, Dublin 2. If you invest in the Appian Unit Trust, you may lose some or all of the money you invest. The value of your investment may go down as well as up. This investment may be affected by changes in currency rates. 

References to past performance are for illustrative purposes only and are not a reliable guide to future performance. Projected returns are estimates only. Forecasted returns depend on assumptions that involve subjective judgement and on analysis that may or may not be correct. 

The above disclaimer and limitations of liability are applicable to the fullest extent permitted by law, whether in Contract, Statute, Tort (including without limitation, negligence) or otherwise.
Appian Asset Management Limited is regulated by the Central Bank of Ireland. 

Appian Unit Fund Prices  
1 December 2016 
Appian Value Fund
Appian Equity Fund
Appian Small Companies Opportunities Fund
Appian Liquidity Fund
Appian Ethical Value Fund

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Patrick J Lawless
Chief Executive Officer
Eugene Kiernan
Head of Investment Strategy
Frank O’Brien
John Mattimoe
Head of Equity Analysis
Lisa Neary
Fund Manager
Niall Dineen
Senior Fund Manager
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Kevin Menton
Tel: (01) 662 3989 direct
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Senior Relationship Manager
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Senior Relationship Manager
Tel: (01) 662 3985 direct
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Client Relationship Executive
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