Big bond investors stick to bearish bets in wild week for markets
By Naomi Rovnick and Yoruk Bahceli
LONDON (Reuters) – Some of the world’s biggest bond fund managers are riding out wild swings in government bond markets, holding on to bearish bets given still sticky inflation that will keep major central banks hiking rates.
The collapse of U.S. lender Silicon Valley Bank (SVB) and a rout in Credit Suisse shares has sparked a flight to safety super-charged by bets that central banks would slow the pace of rate rises to stress-proof the financial system.
Germany’s two-year borrowing costs, sensitive to rate expectations, have slid over 80 basis points over the last five trading sessions in the biggest such drop since 1981.
U.S. peers have tumbled over 100 basis points in the biggest five-day fall since 1987. When bond yields fall, their price rises.
But asset managers that run large government bond portfolios still expect bond yields to rise and say they are selling into the rally, expecting the European Central Bank and the U.S. Federal Reserve stay hawkish.
“Central banks will hike,” said David Zahn, head of European fixed income at Franklin Templeton. “Inflation is still elevated.”
Zahn, who manages assets worth 5 billion euros, said he had “shortened up” into the rally, referring to cashing out positions or using futures trades to bet on yields rising from here.
Legal and General Investment Management (LGIM), the UK-based $1.6 trillion asset manager, is also reducing its exposure to government bonds, taking profits following the bond rally.
“We’ve been reducing some of the rates exposure over the course of the last couple of days as the pricing has moved, leaning against the wind rather than with the wind,” Chris Jeffery, a member of LGIM’s asset allocation team, said.
The ECB, which has lifted rates from below zero to 2.5% since July, is still leaning towards a 50 bps rise on Thursday, a source close to its Governing Council told Reuters on Wednesday. ECB forecasts for core inflation were likely to be revised higher, the source said.
As selling gripped bank shares on Wednesday, money market pricing suggested traders were leaning towards a 25 basis-point Fed rate increase next week.
Goldman Sachs no longer expects the U.S. Fed to raise rates on March 22.
“We have not participated in that complete change of view on the Fed,” LGIM’s Jeffrey said.
Undeterred, big money managers held firm on calls for more hikes.
“We expect rates to rise,” agreed Brian Nick, chief investment strategist at $1.1 trillion U.S. asset manager Nuveen. Nick added that his group had been “underweight” government bonds and avoiding interest rate risk for “a very long time,” adding: “I suspect we’re going to be doubling down on that.”
BlueBay Asset Management senior portfolio manager Kasper Hense said the firm had used the rally in bonds as an opportunity to take short positions — essentially a bet that bond prices will weaken and yields rise.
“It is too early for the Fed to stop hiking rates we expect them to hike by 25 bps, the same from the ECB we expect them tomorrow to hike by 50 bps.”
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International said the firm had been neutral on high-quality bonds but was negative on credit markets to reflect caution.
“We are waiting for the dust to settle down,” said Ahmed, noting there had been no recent change in positioning.
(Reporting by Naomi Rovnick and Dhara Ranasinghe in London and Yoruk Bahceli in Amsterdam, Editing by Alexandra Hudson)