US treasuries are some of the riskiest assets bond buyers can hold despite the perceived calm in the markets at present.
‘The most volatile bond has no credit risk, it is a 30-year US treasury. If you want to measure a volatile price, even in these days with treasury volatility being so long, it is a single payment due in 30 years,’ the Citywire A-rated manager said.
Teresa Kong, who runs the Matthews Asia Fds – Asia Credit Opps and Matthews Asia Fds-Asia Strategic Income funds, said US government bonds are some of the most dangerous securities to hold in this environment.
‘We still think that US treasury bond is probably the single riskiest asset as it offers more downside than upside risk. Why? From a rates perspective, we think US treasuries are more likely to rise in yield than to fall over the next three-to-five years,’ Citywire AA-rated Kong said.
‘For a ten-year US treasury bond, that means a 1% move up in interest rates would translate into a loss of about 9%,' she added.
'From a currency perspective, we see the US dollar as entering the first inning of a multi-year depreciation regime. So, we think we’re better off being as far away from US dollar and interest rate exposure as possible.'
Fuss has found other ways to protect his fund from rate rises and volatility in the market and made several changes to his fund over the past few months.
'We cut the average maturity in half. We took the average quality up two thirds of a letter from where it could be or a complete letter if you measure against the most aggressive it could be,' Fuss said.
'The yield is still good, not as it would be if we hadn't built the reserves. On average we get our money back in principal in income in about half the time that we did a couple of years ago.
Kong has also made changes and increased holdings in Asian corporate and government debt. She said interest rates are still falling in places like Indonesia and India.
'We also see room for credit spreads to tighten as Asia’s high yield credit spread is hovering right around historical average spread, compared to regions like the United States and Europe where high yield credit spreads are hovering around all time historical tight levels,' Kong said.
'We still think the risk-return trade-off is better in Asia credit, currencies, and interest rates compared to traditional “safe-haven” assets like US treasuries, which are far from safe at this stage of the interest rate and US dollar cycle.'