Time for balance sheet restraint?

Central bank sentiment

In July, seemingly more hawkish comments from the Bank of England (BoE) and European Central Bank (ECB) saw global bond yields spike upwards, having spent much of 2017 relentlessly falling despite a more positive economic environment. However, the potential move towards a more normalised interest rate environment quickly reversed as yields resumed their downward path. Geopolitical events – such as the increase in tensions between the US and North Korea – meant the market largely ignored economic news, such as the improving growth outlook in the Eurozone.

Nonetheless, more recently, the BoE has once again suggested that interest rates may be normalised quicker than the market expects. This has resulted in 10 year UK gilt yields hitting 1.31% at the time of writing, nearing late January’s highs. Central banks worldwide are beginning to unwind their decade-long quantitative easing policy, in an effort normalise policy, temper inflation and ensure that some weapons are available should another crisis hit. For example, in September 2007, the BoE’s balance sheet stood at £84 billion. It is now more than five times that size and cannot continue to grow for ever.

The path of interest rates

It is our belief that yields will continue to rise moderately towards the end of 2017 as this balance sheet restraint will put upward pressure on government bond yields. However, the path is likely to be choppy. Whilst central bank policy was the biggest driver of yield moves in 2016, so far in 2017, it has been geopolitical events. Therefore, any new crisis – or ratcheting up in existing tensions – is likely to see investors yet again flock towards safe haven assets.

Therefore, there is likely to be a continued strong demand for products that are able to deliver an enhanced return relative to cash. At Canada Life Investments, our Fixed Income Team are responsible for a variety of funds across the duration spectrum, drawing on the firm’s long experience in annuity management. The newest of these is the CF Canlife Sterling Liquidity Fund, which was launched on 30 June 2017. We believe this portfolio allows investors to diversify their cash from pure bank deposits, provides them with high levels of liquidity and credit quality and seeks to generate an enhanced yield.

The portfolio is significantly diversified across different asset types, issuers and durations. Overnight deposits, for example, offer security and the desired liquidity, whilst the team aim to generate an enhanced yield through the use of carefully selected longer-dated assets. For instance, one position within the CF Canlife Sterling Liquidity Fund is a General Electric bond maturing in June 2018 and delivering a money market yield (MMY) of 0.79%. In contrast, overnight deposits have a typical MMY of 0.15%.


With the uncertain economic and political outlook the UK is currently facing, we expect demand for efficient, secure vehicles for cash management to be well-supported. As long-term fixed income investors, it is our job in this environment to make our investors’ cash work as hard as possible, focusing on sustainable returns and capital protection.

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments can fluctuate. The contents of this article are not intended as investment advice.

The information contained in this document is provided for use by institutional investors, professional investors and professional advisers and is not for onward distribution to, or to be relied upon by, private investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at www.canadalifeinvestments.com.

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CLI00923 Expiry 18 September 2018

Ian Goulsbra

Ian Goulsbra

Sales & Marketing Director, Investments

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