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We all know that Quantitative Easing QE must come to an end and when it does, we’ll likely see rising interest rates and lower bond prices. This has led all sorts of bond managers, from Bill Gross to Jeffrey Gundlach to shorten the duration of bonds in their portfolios, thereby lowering the interest-rate sensitivity of their holdings.
But today’s Wall Street Journal has an interesting article which offers an alternative to shortening duration. This is the story about London based bond-fund manager Stewart Cowley, who’s so bearish on bonds that the majority of his fund consists of bets against bonds.
Cowley, who manages the $1.5 billion Old Mutual Global Strategic Bond Fund, doesn’t hold conventional U.S. Treasury bonds or traditional U.K. gilts. Instead he has taken large negative positions on major government bonds by “shorting” (or betting against) contracts tied to the bonds’ future performance.
His duration is minus-four years, meaning his fund will rise on average 4% for every one-percentage-point rise in the average interest rate for the bonds in his fund. It is the only duration below zero of any U.K. fund tracked by Morningstar.
While this approach is certainly innovative, it isn’t liked by everyone. Jeffrey Gundlach, manager of the $35 billion DoubleLine Total Return Bond Fund, recently told Barron’s “I don’t like the idea in bond funds of saying I’m going to turn my bond fund into an anti-bond fund for the time being. I think that’s something a hedge fund’s supposed to be doing.”
Todays Other Top Stories
FT: – Puerto Rican woes hit US bond insurers. – A downgrade of Puerto Rican debt could eat into the capital cushions of the two biggest bond insurers, as they work to rebuild their finances after the credit crisis, a rating agency has warned.
Reuters: – Moody’s lowers Stockton, Calif., pension bonds deeper into junk. – Moody’s Investors Service lowered the pension obligation bonds of Stockton, California, to ‘Ca’ from ‘Caa3’ on Monday and changed its outlook on them to negative from developing, citing how the city would treat the debt in its plan for exiting bankruptcy.
BusinessWeek: – Harrisburg parking bond sale avoids Chicago regret. – Harrisburg is set to be the first U.S. city in three years to lease its parking operations, part of a plan to rid Pennsylvania’s insolvent capital of $363 million of debt from an ill-fated incinerator project.
Forbes: – What investors should know about Puerto Rico’s economy. – Almost immediately after Detroit filed bankruptcy in mid-July, a variety of financial reporters and pundits turned their attention to Puerto Rico. They held a magnifying glass to the subject of Puerto Rico debt – many, we suspect, for the first time – and managed to light a spark that has been burning ever since.
Forbes: – Storm of Puerto Rican bonds hits U.S mainland. – Over the past few weeks this blog has addressed the storm to hit individual investors who own municipal securities issued by The Commonwealth of Puerto Rico.
FT: – Hedge funds target Puerto Rico debt. – Hedge funds and managers of distressed assets have been buying debt sold by Puerto Rico, as traditional municipal bond investors shun the securities amid worries about the island’s finances.
ETF Trends: – Muni ETFs with reduced rate risk. – Amid elevated interest rate risk and escalating concerns about states’ pension and retiree health obligations, 2013 has been a rough year for municipal bond investors. Losing streaks for some muni bond ETFs have stretched into months and investors have not been shy about pulling cash from these funds.
MuniNetGuide: – Another “DIP” for Detroit unsecured bondholders. – Detroit continues to break new legal ground by using restructuring techniques heretofore used only in the corporate arena. Late last week, the Emergency Manager team announced it was able to obtain a $350 million Debtor-In-Possession (“DIP”) financing from Barclays Bank.
Learn Bonds: – 4 Ways to find ‘real’ yields in a low interest-rate environment. – Looking for yield? You are certainly not alone. The demand for income-producing assets is growing and will continue to grow in the years ahead as more and more baby boomers leave the full-time workforce and navigate their way through a new chapter in their lives. But the Fed’s ultra-easy monetary policy is complicating things for income-focused investors by helping to hold yields lower than they otherwise would be. So what’s an investor to do?
Yahoo Finance: – Uneasy investors sell billions in Treasurys. – While leaders in Washington have been chasing a deal to avert a U.S. default, investors and banks have dumped billions of dollars in government debt.
CNBC: – Debt default damage already unfolding. – Just when will the threat of a U.S. debt default began to inflict damage on the U.S.economy and global financial system? It’s already happening. And until Congress gets over its temper tantrum and lifts the Treasury’s borrowing authority, it will get progressively worse.
About.com: – If Government debt is the problem, why aren’t Treasury prices falling? – At first glance, it makes no sense. The government is in “shutdown” as politicians debate the budget, and the Treasury could run out of money in just nine days if Congress fails to raise the debt ceiling. If the U.S. government were to default on its debt (i.e., fail to make payments), the result would be a massive spike in the yields on U.S. Treasuries (and a concurrent drop in price). Why, then, have government bonds remained relatively flat in the past ten trading sessions?
Interactive Investor: – HSBC launches high-yield fund. – HSBC Global Asset Management has launched the GIF Global Short Duration High Yield Bond fund, which aims to produce high income whilst minimising interest-rate risk.
Emerging Markets: – More EM bonds buyers than you think. – To paraphrase Mark Twain, reports of the death of emerging bond markets have been greatly exaggerated. From the trough of the Global Financial Crisis in March 2009 until May of this year, dedicated emerging market (EM) bond funds saw $87 billion of inflows – an unprecedented scale of interest in these markets. Outflows since then have reached almost 10% of this figure in just four months.
Your Wealth Effect: – Still hoarding cash. – Like the shoppers filling their carts on threat of a hurricane, investors became panicked during the 2008/2009 storm and started stockpiling their cash and now five years later, they’re still at it.
ValueWalk: – Bonds untouchable after taper hint. – The hint of the proposed taper, even though it did not materialize, has made a permanent dent in investors’ appetite for bonds, and fund flow to the bond market has turned negative post-May.
Bloomberg: – U.S. bill supply at eisenhower-era low seen bolstering bonds. – Lost amid concern that the U.S. is headed toward a default is a fact that bulls say may help underpin American debt prices: supply of the shortest-term securities is shrinking.
USA Today: – After holiday, all eyes turn to bond market. – When it comes to investments, U.S. government bonds have long been considered a “risk-free” asset. If you buy a bond from Uncle Sam, you rest assured you’ll get your principal back and receive timely interest payments.
FT: – Bond trading slowdown hurts Citigroup. – Citigroup reported net income of $3.2bn in the third quarter, missing analyst estimates, on lower fixed-income trading and a drop in mortgage banking.
$MS bond salesman sending pictures of sharks this morning. Bond trading must be REALLY slow
— David Schawel (@DavidSchawel) October 15, 2013
US three-month T-Bill auction: lowest bid to cover since July 2009, highest rate since Feb 2011
— Chris Adams (@chrisadamsmkts) October 15, 2013