CNBC Comment: Sector plays for the smart investor if bond yields begin to rise again

AFTER the latest Federal Open Mark Committee minutes, and Fed chairman Ben Bernanke’s reiteration that easy monetary policy “is needed for the foreseeable future,” we remain in an environment favourable to equities. But despite recent dips in yields, fixed income may again find itself under pressure. If this plays out, a smart investment strategy would be to look at which sectors would do well if bond yields start to rise again.

Henry Dixon, a fund manager at Matterley Asset Management, doesn’t think we’ll see a material economic impact on corporates, the consumer, or governments from rising bond yields. The government is still in a situation where bonds are maturing from before the financial crisis, meaning that bonds with coupons of 5 per cent or 6 per cent now are being reissued with coupons of 2.5 per cent. The same scenario is playing out at a corporate level.

With the consumer in mind, Dixon argues that banks stand to benefit. A decrease in Libor rates is positive, as banks are becoming more willing to lend to each other. This in turn will help the economic recovery. Also, any increase in overnight deposit rates translates through to an uptick in profits. On top of that, more than 80 per cent of Britain’s mortgage market is fixed to the base rate. Dixon thinks that, with Mark Carney in town, there is no chance of a disorderly rate rise.

Life insurance is another sector Dixon thinks could benefit from rising bond yields. Because of the rising discount rate, liabilities within a life insurance business fall at a greater rate than any falls in assets. Finally, Dixon points out that the mining sector historically has done well under rising bond yields, as this trend tends to mean an economic recovery is underway. He recommends Rio Tinto as a particular play.

Bernanke gives his semi-annual monetary policy testimonies this week. However, after the latest Fed minutes, we know what we need to know – tapering is still is a way off. In the UK, watch for inflation data today, and Monetary Policy Committee (MPC) minutes tomorrow, as both will be scrutinised ahead of the next rates announcement in August. Most expect inflation to creep up to around 3 per cent, which would help the MPC justify no change to its QE programme or rates.

Louisa Bojesen is anchor of CNBC’s European Closing Bell. Follow Louisa on Twitter @louisabojesen