The bond bear market has not reached its worst point yet and it would pay to be short duration as the situation intensifies, Richard Woolnough has warned.
Woolnough, who runs the giant M&G Optimal Income fund, made the comments in a short blog post designed to address whether bonds are at a turning point or not.
Focusing on market comments regarding the labour market, rates and the trajectory of the 10-year treasury, Woolnough also directly addressed his peers Bill Gross and Jeff Gundlach, who said a bear market was confirmed by sudden movements in the second week of January.
‘US interest rates have been normalising for a while, and the flatness of the yield curve suggests that markets believe that rates will peak soon,’ Woolnough said.
‘From a technical point of view, as pointed out by Gross and Gundlach, we are at a crucial inflection point. Is the long term structural bull market as shown in the 10 year yield chart below about to resume, or is it over?
‘Due to US leading indicator data, the added impetus of tax cuts, strong synchronised global growth, and the return of the missing link of US confidence as I outlined last year, I think the probability of the recent bear market in bonds stopping at this point is limited and it is why I remain short duration across my portfolios.’
Woolnough has been very active on his duration exposure over the past year, having cut UK holdings to negative duration in early 2017 and reiterated his position towards the end of last year.