RSA Investments is favouring long-dated Treasuries in the US in the belief yields will not rise as q...
RSA Investments is favouring long-dated Treasuries in the US in the belief yields will not rise as quickly as at the shorter end of the curve.
The group feels the Federal Reserve is unlikely to cut interest rates again this year and that there will be an economic recovery in the US fuelled by the recent loosening of monetary and fiscal policy.
According to Dave Hooker, investment manager, fixed interest at RSA Investments, the group forecasts that 30-year Treasury yields will rise to 5.55% over the next 12 months from 5.52%. Five-year Treasury yields will rise to 4.75% from 4.42% over the same period, the group believes.
'We do not believe the Federal Reserve will ease rates again as it has probably done enough and it seems the contraction in the economy is coming to an end,' says Hooker.
'This year will be mostly about capital preservation and we prefer to hold a mixture of cash and longer-dated Treasuries. We are overweight cash and 30-year Treasuries and are moving away from the two and five-year areas of the market.'
Aberdeen Asset Management believes there will be evidence of growth in the US during 2002 and that there may even be a further interest rate cut.
Rod Davidson, head of global fixed income at Aberdeen, says: 'We see there being positive growth in the US this year. This will be picking up in the second half of the year and will be non-inflationary growth, which tends to provide a reasonable backdrop for the bond market.
'There has been upward pressure on yields in the run-up to the end of last year in anticipation of the pick-up in the economy and we can see some further upward pressure on bond yields. But a four-year Treasury is offering a yield of around 4.5%, for example, and, with inflation at below 2%, that is an attractive return.'
According to Davidson, Aberdeen believes US interest rates could bottom at around 1.5% in the first quarter of this year with a further cut from the current level of 1.75%.
He says: 'There is talk that we have come to the end of the interest rate easing cycle. Our interest rate forecast is below that of the consensus and we do not think rates will be raised before around halfway through the second half of the year.'
Davidson says Aberdeen has been conservative in terms of duration positions in its global fixed income portfolios and will tend to have some exposure to most durations.
But, the group will look to extend durations when it gets clearer evidence of the economic picture in the US.
It is planning more into five-year Treasuries from two-year Treasuries as part of its duration extension move.
The yield on two-year Treasuries is 3.15% and on five-year Treasuries is 4.44%. Aberdeen is also looking to move more into 10-year Treasuries from five-year Treasuries, with the yield on 10-year US government debt at 5.13%.
The US government announced last year it was suspending the issuance of 30-year Treasuries and instead issuing more debt at the two and five-year end. Hooker says this makes 30-year Treasuries attractive for their relative scarcity and two and five-year debt the areas to avoid due to a potentially large supply.
Aberdeen expecting another US rate cut.
Inflation in the US likely to stay low.
RSA favouring long-dated Treasuries.
US has suspended 30-year Treasury issuance.
Yields to rise for two and five-year treasuries.
RSA favouring cash in bond portfolios.
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