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Little DFM consensus on Treasuries as debt ceiling X-day looms

It is not hard to find apocalyptic predictions of what will happen if the US runs out of money in two weeks.

US Treasury secretary Janet Yellen has said there is a deadline of June 1 by which a debt ceiling deal must be reached and discussions in Washington DC are currently being held in their typically bipartisan manner.

We're operating on the perhaps naive assumption that a deal will be reached but, whether it's this or the market view that US interest rates are reaching peak, the fate of the dollar is likely to be a significant determinant of investor returns in the year ahead.

Although a peak in rates would usually be expected to lead to relative dollar weakness, as of course would a debt default, any prospect of a global recession would boost the dollar as a safe haven.

Indeed there are some who suggest that the US running out of money would be good for Treasuries since it would help tame inflation and encourage a flight to safer assets.

With all of that in mind we took a peek at the level of US Treasury exposure among the DFMs we cover.

As the chart below shows, the DFMs we cover have an average of 3 per cent of their balanced portfolios in Treasuries, compared to around 3.3 per cent in gilts. 

As ever, there are outliers, with a number of firms, including Invesco, Progeny and Quilter's Wealth Select portfolio, having zero in the asset class, while Quilter's Cirilium portfolio has just under 5 per cent in T-Bills.

But Tacit has 27 per cent in Treasuries. To wrap a little context around that, Tacit’s balanced portfolio is hugely overweight to fixed income, having 44 per cent of the capital there as at the end of February, compared with a peer group average of 27 per cent.  

Tacit also takes a very inflation-focused approach.

Tacit has the second largest gilt exposure , at 10 per cent, topped only by Invesco at 12 per cent. 

M&G Wealth and Evelyn Active are among the firms with zero in gilts. 

The most popular US Treasury fund among DFMs by some distance is Vanguard US Government Bond Index, which is owned by 13 DFMs.

All the other US Treasury funds in our database (which incidentally are all passives) are owned by just one DFM each.

Of course many firms will have indirect gilt exposure via the bond funds they own.

By far and away the most popular global fixed income product among DFMs is Vanguard's Global Bond Index fund, which is owned by nine allocators (the next closest product is Robeco's Global Credits fund which is owned by four).

The Vanguard fund has 51 per cent of its capital in Treasuries, while we estimate that Royal London's International Government Bond fund has 49.7 per cent of its capital in Treasuries and the HSBC Global Government Bond Index fund has 42.6 per cent.

(These two funds do not disclose their Treasury holdings but these are their US exposures and since they are government bond funds we put two and two together)

At the slightly racier end of the bond spectrum, Vanguard's Global Credit Bond fund has 11 per cent in Treasuries while Pimco Global Bond has 7 per cent.

The Robeco fund has just 0.9 per cent in the asset class, presumably a position taken purely with liquidity management in mind. 

It is owned by four of the allocators we cover, and is specifically a short dated bond fund. 

With that in mind, it's hardly surprising performance has been strong on a one and three year view. 

The largest sectoral exposure is to financials, and many companies in that universe are required to own regulatory capital that is very liquid, implying Robeco's portfolio has an underlying sensitivity to government bonds. 

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