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Home > Investments > Fixed Income

By Bradley Gerrard | Published Sep 28, 2012

US government bond rally tipped

Bond fund managers tipped continued rallies in the US government bond market last week, as fears over the economy’s impending ‘fiscal cliff’ mounted.

The yield on benchmark US treasuries maturing in 10 years slipped back under the 1.7 per cent mark last week, in a sign that investors were trading back into the ‘safe haven’ asset class.

A fortnight ago, in the wake of the US Federal Reserve’s announcement of a $40bn (£25bn)-a-month programme of additional quantitative easing (QE), yields had surged above the 1.8 per cent mark as investors flocked into riskier assets such as equities.

The debate over the fiscal cliff – a massive series of tax rises and spending cuts – is set to reach a climax in the US Congress later this year, when Republicans and Democrats will most likely have to agree on whether the government should delay the measures to prevent them from crippling the US economic recovery.

Sanjay Joshi, head of fixed income at London & Capital, said he was retaining a bias towards US treasuries.

“What one would expect is regardless of who wins the election the effect of the fiscal cliff will be pared down. [However,] we are predicting there will be a 1-2 per cent fiscal policy drag on economic growth in the US next year,” he said.

James Foster, manager of the £555.9m Artemis Strategic Bond fund, has also adopted a “higher-than-normal” weighting in US treasuries.

The manager is holding 8 per cent of his portfolio in the asset class, and has also boosted UK government bonds to roughly 3 per cent of the fund.

“My feeling is when people get scared they tend to hide in treasuries and it will be a fraught process to get an agreement between the Republicans and Democrats,” he said.

However, some investors came out in favour of riskier assets, amid central bank action and some positive surprises in economic data.

Mark Holman, managing partner at fixed income fund manager TwentyFour Asset Management, said: “We have been in risk-on mode since the European Central Bank reduced its deposit rate to zero in July and there are good reasons why investors should be taking more risk. Central banks are behind the markets and investors are getting very well paid to take credit risk.”

Best tweet... @luschini_janney The [recent] boost in [US] consumer confidence is encouraging. If the fiscal cliff is averted, the economy could surprise positively in 2013.

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