Bond stars scrap shorts on treasuries as yields plunge

Old Mutual’s Stewart Cowley and LGIM’s Richard Hodges have reversed their short duration stances and removed their treasury short positions as the flight to safety pushes yields to record lows.

Cowley, who began shorting the US treasury market at the start of the year, has now moved long duration on G5 government bonds as he moves his £513m Global Strategic Bond fund to more of a “classic” exposure.

“The world has changed a lot in the past six weeks and our thinking has had to change with it,” said Cowley.

Legal & General’s Richard Hodges, meanwhile, has stopped out a short position in two-year treasuries within his £1.7bn Dynamic Bond Trust.

The manager said there is little point maintaining the position at a time when two-year yields touched a record low of just 0.177% last week.

“I capitulated and the position has been removed from the fund. Average duration has moved up to 4.96 years  prior to that it was around 3.5,” said Hodges.

The manager added duration has risen from zero over the course of the past three to four months, a “meaningful change” enacted through the use of gilt futures and index-linked gilts.

Hodges noted UK government debt is now regarded as “one of the least risky assets in the universe”, but said he is maintaining hedges on his gilt positions in case the market began to doubt the UK’s strength once more.

Both gilts and 10-year treasury yields touched record lows this month as volatile markets prompted investors to rush to safety.

Cowley said he believes a new era of austerity will lead to “ongoing downward pressure” on G5 government bond yields, with US treasuries and gilt yields in particular moving towards Japanese levels.

Cowley said this has led him to favour a long duration stance in these assets, despite those yields making them unattractive on an absolute basis.

The OMAM manager said he has about a quarter of the fund in credit but warned the time is not right to move heavily into high yield.

Hodges, who had as much as 50% in high yield earlier this year, now has 25% in the asset class, a position he will maintain while volatile market conditions persist.
Other big names are still betting on a spike in US government bond yields.

William Littlewood, manager of the £968m Artemis Strategic Assets fund, is maintaining his short positions, including those on US bonds, in the belief yields are pricing in deflation, an outcome that would be “intolerable” to policymakers.

Hodges said he is treading carefully with his longer duration position, given the risks of a spike in equity markets prompting a rise in yields, but warned liquidity in the market is “as bad as I have seen it in late 2008 and early 2009”.

“At the moment it is more a question of catching a falling guillotine than catching a falling knife,” he said.

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