RLAM government bond duo plot derivatives moves

Paul Rayner and Darren Bustin, managers of the £195m vehicle, said tools such as interest rate swaps or options may grow in importance this year, particularly as central banks part ways on monetary policy.

The pair, whose fund aims to eke out small but steady returns, added that major political events, such as the US presidential election and the UK referendum on EU membership, may also play a role.

Mr Rayner said: “We can buy and sell volatility as an asset class using options. You have all the risks of Fed hikes and general elections and who knows what [European Central Bank president] Mario Draghi does in terms of future quantitative easing. Brexit volatility in the UK may also have a part to play.”

The managers have already employed such strategies “in a small way” recently, taking a position in relation to last September’s Fed meeting, where the market had priced in an interest rate hike that failed to materialise.

Any return to derivative strategies would depend on an uptick in volatility, they stressed. “When volatility is low, the range of opportunities may reduce,” Mr Rayner said.

Bond markets are already showing signs of divergence in response to changing monetary policy in the US and Europe.

The US Federal Reserve upped the target range for the federal funds rate to 0.25-0.5 per cent in December, but the Bank of England has maintained a more dovish tone.

Monetary policy is looser still in the eurozone, with Mr Draghi pledging to extend the ECB’s QE programme – which amounts to monthly asset purchases of €60bn (£44.2bn) – albeit by less than had been expected.

According to Mr Bustin, this disappointment showed that slavishly following central bankers’ pronouncements is a mistake. Investors in 2015, he warned, had been overly influenced by central banks, which have proven unpredictable.

He said it was a year where the consensus trade hurt. “Don’t put too much weight on what central banks are telling the market. You can take the examples of [Bank of England governor Mark] Carney and Mr Draghi flip-flopping, though I think [Fed chair Janet] Yellen is a lot more steady.” Policy mistakes may have already materialised, he added.

“We are going to be talking in six months about how the central banks should have raised rates earlier.”

The duo believe chances to exploit developed market policies will emerge in 2016. Mr Rayner said: “A world where we have got central banks moving in different directions could drive opportunities.

“At the moment, you have the US raising rates but the UK rise isn’t priced in until [later in] 2016. Usually in the event of a rate rise, you get flatter yield curves, while in rate-easing environments you get steeper curves. So we would expect it to flatten in the US and steepen in Europe.”

The managers said they would consider buying 10-year bonds and selling 30-year bonds for regions where the curve should steepen – such as Europe – while doing the opposite for markets such as the US, where it is expected to flatten.

CHANGING POLICIES

0.25-0.5%

New target range for the federal funds rate

€60bn

Monthly purchases as part of the ECB’s quantitative easing programme