Now is the time to think tactically about how central bank tightening will impact bond markets or you could be on the wrong side of volatility.
That is according to Unigestion’s Jeremy Gatto, who manages the Unigestion Multi-Asset Navigator strategy.
Speaking at a roundtable event in London, Gatto said the team has taken a number of tactical allocations in recent months due to the impacts of monetary policy.
‘We have an uncertain monetary path, we are convinced that a high volatility range is here to stay. We have been through an exceptionally long period of low volatility and this is now over.
‘As central banks tighten you will only get volatility. For that reason, we are short credits because of the low liquidity environment and high volatility.’
Gatto is currently around 25% short investment grade credit and said monetary policy growth over the next few years is set to become even more prominent.
‘Central bank tightening means less liquidity. Credit is usually a lot more liquid, and, given that the carry you get from investment grade credit doesn’t compensate for the risk you take by being long credit, it makes sense to be short credit for us at the moment.
‘World growth is excellent in these types of environments, so we want to be long growth assets to benefit from that. We are long global equities (35%) to take advantage of this supportive macro context.’
Elsewhere, Gatto said inflation has gradually been picking up and this is a risk for the fund. 'For the short term, we are tactically long government bonds. This is because the market has converged its pricing to our expectations.
'The market pricing is in line with the inflation risk and, given the carry that bonds offer at these levels, our position is tactical and should bond yields come off quite significantly, then we will take it down.’
Gatto said duration allocation is also a tactical bet alongside shorting credit and being long government bonds.
'Bonds have a carry, they pay you to hold them. Given the movement we have had in bonds recently - with yields converging in the US close to 3% - then you would need to see quite a significant move higher in yields to be compensated for being short bonds.
'At these levels, and given that market positioning is quite heavily short bonds, we think it makes sense from a tactical position,’ he added.