Nothing perturbs a professional bond manager more than the prospect of rising yields in 2014
January 17, 2014 Leave a comment
Last updated: January 16, 2014 6:43 pm
Prospect of rising yields generates fear
By Michael Mackenzie
Bond managers are sharply underweight
Nothing perturbs a professional bond manager more than the prospect of rising yields in 2014. Such fear is clearly illustrated by the latest positioning data courtesy of Stone McCarthy, showing bond managers are sharply underweight the duration of their benchmark, the Barclays Aggregate index, and they are the most defensively positioned against interest rate risk since they were in 2008.Duration reflects the sensitivity of a bond portfolio to rising interest rates and last year’s sharp rise in yields was very painful for bond holders.
So it comes as no surprise that portfolio managers have entered the new year wary of further collateral damage from rising interest rates, particularly as the Federal Reserve looks to reduce its monthly bond purchases at a steady clip.
For all the angst, long-term bonds are outperforming equities this month. Pension plans are cashing in their large equity gains from 2013 and locking the money in bonds that carry higher yields than 12 months ago.
The risk for bearish bond investors is that low US inflation and last year’s rise in long-term yields provides a favourable backdrop for the bond market. Such bond managers may miss out if long-term bonds buck the consensus call that higher yields are an inevitable story in 2014.
Demand versus supply could also play a role in keeping yields contained. RBS expects global demand for high quality US bonds in the vicinity of $2tn in 2014, but says net issuance will probably total $1.4tn.
A stronger dollar and a flight by Japanese investors from their low-yielding domestic bonds could well mean that US yields surprise many investors this year.
Finally, it has not gone unnoticed by some in the market that positioning data are often contrarian indicators.
When bond managers were defensively positioned in 2008, the 10-year yield subsequently dropped sharply.
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