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By: John E. Dunn, III, Principal, Oak Point Investments

Given it is now my sixth year representing several world class alternative fixed income fund managers, over this same timeframe, just about every institutional investors I talk with has a lingering fear that sometime, somewhere interest rates will once again start an upward path. The rate direction debate continues between economic commentators, either a global savings glut is responsible for only short term low interest rates and upcoming demand is likely to revive rates, or the new neutral interest rate consensus may actually last a few years longer. But clearly there is "Bonds be Dammed" fear in the market. Institutional fixed income portfolios confirm this: bond portfolio duration has been decreasing for several years to a strict standing minimum and any discussion of an eventual impact of higher rates with a group of institutional money managers (particularly our pension funds) makes everyone quietly nervous.

Of course, bonds traditionally have been known as the lowest volatility asset class, but volatility is truly a poor measure of risk in the bond market when interest rates start rising. Little known is the fact that between 1940 and 1988, fixed income returns in the US in REAL terms were underwater for 48 years : US Aaa yields peaked in 1981 at 15.5% and have been declining ever since. In a brilliant historical review of previous rate hikes, the fund manager Welton2 has categorized four periods of majo......................

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