Fixed Income  

Managers anticipate government bond yield rises

High-profile bond managers from JPMorgan and BlackRock are putting on trades that will make money for their funds if US government bond yields rise.

Concerns around the sustainability of the global economic recovery and geopolitical tension between Ukraine and Russia have seen a rally in so-called ‘safe haven’ US debt so far this year, bringing yields down to roughly 2.7 per cent.

BlackRock’s Ian Winship (pictured) and Iain Stealey at JPMorgan Asset Management said they were using this rally to build up positions that will benefit from what they see as an inevitable rise in US yields.

Mr Winship, manager of the £91m BlackRock Absolute Return Bond fund, said a yield of between 2.6-2.7 per cent on US 10-year bonds was far too low and “does not reflect how normal things are”.

He said: “The environment feels more normal because we are no longer worried about economic collapse. It is just a normal healing process and I do not think yields at 2.6 per cent reflect that on a 10-year bond.

“In 2015 we will be moving away from crisis sentiment and markets will have to reflect that.”

Mr Winship said he was looking to build up a short position on US debt, which will benefit if US bond yields rise. He said he would be adding to the position throughout the next month.

Mr Stealey, co-manager on the £598.4m JPMorgan Strategic Bond fund, is using derivatives to employ a negative duration strategy on the portfolio he runs with Matthew Pallai, Robert Michele and Nick Gartside.

The trade means the fund will also stand to benefit if US government bonds react negatively to a hike in interest rates by the US Federal Reserve. The managers have used derivatives to hedge out the portfolio’s sensitivity to interest rates, effectively ‘shorting’ duration.

Mr Stealey said: “We know interest rates are going up, and against that the yield on US Treasury bonds seems a little bit low.

“The upside of having a normal duration exposure is less than what you could lose [when rates rise].”

The manager added that this position had also allowed him to “isolate” the movement of high-yield bond yields and government bond yields. The difference between the two – known as the spread – provides an attractive investment in spite of high bond prices overall, Mr Stealey said.

“At the margins, we are reducing high-yield exposure but fundamentally we are still happy to hold it,” he added. “Recent issuance has been okay, but default rates are quite low: average yields were 4.99 per cent last year. Today they are roughly 5.25 per cent, so at the lower end still, but spreads are a lot [wider] than they were.”

But Mr Winship said he was looking to add some exposure to global high yield, as well as emerging market debt, into his fund because he had been very light on both sectors up until now. He said while high yield was not cheap, investors’ “need for income” will keep a floor on the downside.