Citywire A-rated Ariel Bezalel has rebalanced his strategic bond funds and reduced the level of overall duration after selling out of longer-dated US debt.
In an investment update, Bezalel, who runs the Jupiter JGF Dynamic Bond fund, said several factors had caused him to tactically reduce duration in the portfolio from six years to 4.5 years after selling out of 20- and 30-year US treasury bonds.
‘From a technical perspective, we are mindful that the policy-driven yield compression which has already occurred has limited the opportunity for further upside. For example, the US 10-year yield began the year at around 2.25% but has since fallen steadily, breaking below 1.4% in July.’
‘Simply put, at these levels treasuries now look expensive and risk reward favours taking some profits here. Conversely, we are also wary of the potential impact that a temporary pullback in yields, like the brief spike we saw in the German bund market last summer, could have on the portfolio,’ Bezalel said.
Bezalel still holds various US government bonds and the US is the third largest geographical allocation in the fund at 19.5%. Other fixed income managers have recently slashed duration and the manager thinks any changes in the US could have a significant impact on US bonds.
‘Stronger US economic data has brought the possibility of a US interest rate hike in 2016 back into play. Recent data suggests that the US economy is now gathering speed after a sluggish first half of the year. Unemployment is below 5%, PMI data for manufacturing has rebounded strongly while the reading for the crucial services sector remains robust.’
‘At the Fed’s July meeting, Janet Yellen stated that “the near term risks to the economic outlook have diminished”. The market-implied probability of a rate hike in September or December has increased and as a result it seems prudent to take some risk off the table,’ he said.
Opportunities down under
Despite selling off some US government bonds, Bezalel remains positive on high quality sovereign debt as the asset class reduces volatility and acts as a counterweight to credit positions. Government bonds make up 34.0% of the fund compared to a 53% allocation to corporate bonds.
Five of the top ten holdings in the fund are Australian government bonds of different maturities. The country’s central bank has cut interest rates to 1.5% and Bezalel thinks there is potential for additional upside.
‘Inflation has fallen below the Reserve Bank of Australia’s 2% target level as the economy continues to feel the effects of weaker commodities prices. Similar dynamics are present in New Zealand, where a further rate cut is currently expected in August.’
The Jupiter JGF Dynamic Bond L USD Q Inc HSC returned 21.5% in US dollar terms over the three years to the end of June 2016. This compares with a 1.1% loss by the average manager in the Bonds – Global sector over the same timeframe.