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Bond managers bet on market bottoming as fears of slowing growth mount

Lewis Jackson  |  05 Jul 2022Text size  Decrease  Increase  |  
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Several highly rated bond managers are repositioning portfolios in expectation that the historic selloff in bond markets may be bottoming as central bank rate hikes risk stalling economic growth.

After correctly betting in early 2021 that central banks would be forced to raise rates faster than expected, silver-rated Bentham Global Income is now slowly reversing direction. Strategies from Janus Henderson and Macquarie are similarly lengthening interest-rate duration in their portfolios in response to the record yields now on offer in government bonds long-anchored near zero.

Bentham chief investment officer Richard Quin anticipated the jump in interest rates that triggered this year’s market bloodbath. Now he is concerned central banks will have little choice but to kneecap spending and risk a recession in the campaign against inflation.

“It reminds me of a Keating phrase, the recession we had to have,” says Quinn. “What style of recession we have is still up for grabs. I do actually think Australia is likely to have a harsher experience than other countries because we’re 10 times more sensitive to interest rate rises.”

He cites the prevalence of variable rate mortgages in Australia, which quickly transmit interest rate changes to household income.

“We were short interest rate risk and now we’re long interest rate risk,” he adds, in reference to the fund moderating its bets on rising interest rates.

The $2.6 billion Bentham Global Income is down 2.4% as of 30 June, compared to a 10.3% fall for the Morningstar Australian Core Bond Index. It is the 9th best performing fixed interest fund year-to-date of the 83 under Morningstar coverage.

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Similar wariness about inflation helped T. Rowe Price’s bronze-rated Dynamic Global Bond post a 5.16% return for the half year.

The shift in fixed interest funds comes amid the worst selloff in decades as investors flee fixed interest fearing how rising rates and inflation will erode the asset class’s steady coupon payments. Yields on 10-year Australian government bonds are up 117% this year as markets price in a rapid sequence of meaty rate hikes from central banks around the world. Yields rise as prices fall. Some managers believe the selling is now overdone, says Michael Malseed, director of manager research at Morningstar.

“Across our cohort are managers who believe that [interest rate] expectations have overshot, even as they acknowledge that further monetary tightening is inevitable,” he says. “This view hinges on the speed and size of interest-rate hikes proving too restrictive and stalling out growth, limiting the ability for policy rates to reach these levels.”

Managers adjust strategies based on expectations of where rates will be months or years from now. Where they expect growth to slow and interest rates to fall, a bond’s secure and stable fixed stream of income becomes more valuable. The opposite is true when growth is strong, and rates are rising.

Investors in the US and Australia are repositioning for fewer rate hikes as data from economically sensitive sectors like housing and rail freight shows signs of slowing. Expectations that US rates would be above 3.5% in July 2023 fell from 47% last week to 16% on Monday, according to data from CME.

Australian futures markets are now forecasting a cash rate of 3% by December, down from 4% last week.

Malseed notes several other funds to have increased interest rate duration, including Janus Henderson’s silver-rated Tactical Income and Macquarie’s neutral rated Dynamic Bond fund. They are down 4% and 8.7%, respectively.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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