IPE Institutional Investment: Mr McDevitt, when will central banks or rather Fixed Income markets return to ‘normal’?
McDevitt: At the beginning of 2014 markets were ready to believe in a return to ‘normal’ and with that the initiation of higher interest rates by some central banks. But we all know how the year progressed...

IPE Institutional Investment: Interest rates continued to decline and bonds frequently beat the stock markets...
McDevitt: Correct, central banks have maintained an easy policy bias. Low interest rates have helped debt servicing, but have not encouraged deleveraging and therefore global debt levels have reached a new high. This may be the biggest problem the central banks will face in 2015 and beyond in trying to ‘normalize’ monetary policy.

IPE Institutional Investment: What about the subject of Asset inflation in this context?
McDevitt: You are mentioning a keypoint. As we see it, inflation in the narrow sense will not be an issue in the year 2015. we should rather be worried about deflation, especially in view of the strongly declining oil price. But ...

IPE Institutional Investment: But?
McDevitt: But of course, low interest rates push up prices for assets such as stocks, bonds and real estate. This should not change in the light of continued low interest rates in 2015.

IPE Institutional Investment: The US economy still seems to be the strongest from a global perspective. Will the FED accordingly keep a tighter rein and adjust the interest rates upwards?
McDevitt: We do expect the Fed to eventually move away from the ‘zero-interest-rate-level’. But we do not see a high probability of returning to levels over 3% in the next 12-24 months as many market observers predict. Any move toward 1% let alone towards 2% would be quite substantial.

IPE Institutional Investment: You mentioned the high level of debt. How will this affect the central bank policy?
McDevitt: The mountain of debt makes it near to impossible for central banks to tighten the interest rates due to the direct impact on debt servicing. I am surprised by the speculations of many market observers who expect a return to ‘normal’ interest rate levels which we have known from the past. This hardly seems possible to me given the mountain of debt!

IPE Institutional Investment: What do you think of the ‘depreciation of the euro’ that Draghi de facto brought forward in autumn 2014? Will this cause a currency war?
McDevitt: We don’t just see this with the Euro at the moment. There are a number of countries that are currently trying to force new growth through weak currency. This can work for a short time. But soon we will see how the US handles the headwind of a much stronger currency. The upswing in the US is not strong enough to handle both a much stronger dollar and a sustained tightening of monetary policy.

IPE Institutional Investment: What do you think is the largest risk for Fixed Income investors in 2015?
McDevitt: Many won’t have this on the top of their list but I am particularly concerned about the matter of ‘liquidity’. The low volatility in the markets hardly suggests risk here. As soon as the markets turn or volatility rise we will see the door closing for trading for market participants in particular Fixed Income areas as banks can no longer provide the say liquidity due to tighter capital controls.

IPE Institutional Investment: Apart from that there is little risk for bondholders within sight?
McDevitt: Currently there is no inflation on the horizon. This is the big positive support for bond holders. In this environment interest rates in the US or UK are likely to only rise moderately in 2015-2016. Europe however faces the risk of a ‘Japanification’, that is deflation. This is no scenario in which bondholders should panic in 2015 as the ECB is committed to do ‘whatever it take’. Risk management should nevertheless be a priority as longer term Europe has big structural headwinds.

IPE Institutional Investment: On the other hand does this promise a low interest rate environment for another year?
McDevitt: Basically yes, particularly for European fixed income. However, 2015 is likely to provide meagre total returns.

IPE Institutional Investment: Thank you for these insights!