Bond investors need to be prepared to lose money when the US Federal Reserve begins to reduce its quantitative easing (QE) programme, according to Axa Investment Managers’ Nick Hayes.
Mr Hayes is tactically raising the cash level in his $178m (£114.7m) Axa WF Global Strategic Bond fund in preparation for a further sell-off across asset classes when the ‘tapering’ of QE begins.
The announcement by the Fed in June that it would scale back QE led to a sell-off across all asset classes except the dollar, and Mr Hayes said the same would happen when tapering actually begins because the market had yet to price it in fully.
“All asset classes will sell off again when tapering starts,” the manager said.
“The correction in government bond yields will mean everything sells off. This has a big knock-on effect and it has to happen at some stage. To overcome that, you need to be diversified and you need to hold a lot of cash, but most importantly you need to be prepared to lose money.”
However, the manager is tactically buying into US high-yield bonds, and has done so for the past month after yields rose during the sell-off in June, citing the asset class’s “attractive” 7 per cent yield.
He has also been adding to the fund’s European high-yield holdings by participating in some bond issuances at the end of July, as part of a short-term tactical move to take advantage of current yields and prices in the high-yield market.
Elsewhere, Mr Hayes said he had increased the duration on the UK portion of the fund following the Bank of England’s introduction of forward guidance on interest rates earlier this month. New Bank governor Mark Carney said rates were likely to remain at 0.5 per cent until the UK unemployment rate fell to 7 per cent.
Mr Hayes said the duration on the fund – indicating how sensitive the portfolio was to movements in interest rate expectations – was roughly four years, having been as low as three years earlier in 2013. He added that it was likely to be reduced from its current position in the coming months.
At the same time, Mr Hayes said he has been shortening the duration on the fund’s US bonds in anticipation of the end of QE.
