The medium to long-end of the US Treasuries markets is favoured as expectations the Federal Reserve ...
The medium to long-end of the US Treasuries markets is favoured as expectations the Federal Reserve will affect a slowdown in the economy increase.
Norman McChesney, a senior fund manager at Aberdeen, believes the main theme concerning US Treasuries is the slowdown of the economy.
He says: "These bonds are governed by the sentiment on the strength of the economy. The big question is whether the slowdown is for real or if it would bounce back. Over the past two months there have been genuine signs that the economy is slowing down to more sustainable levels."
McChesney believes the Fed is on track to a soft landing. He adds: "The Federal Reserve appears to have sufficiently pre-empted the slowdown by raising rates and keeping inflation pressures down. Another positive is that the dollar has remained strong. If the euro were to rally, which is very unlikely, then that would be negative for the market."
Peter Geikie-Cobb, fund manager at Merrill Lynch, is also optimistic about the US Treasury market and favours the longer end of the market.
He explains: "If there is a hard landing then the shorter end will outperform in yield terms, but the longer end will be more durable in portfolio terms. If there is a soft landing then tax receipts will remain strong and the surplus will continue, as will the US Treasury supply shortage and the programme of buybacks.
"We have seen a slowdown in the third quarter to just below 3%, last year growth was strong and averaged 5%." He notes the economy remains robust and the federal reserve has not yet finished the interest rate cycle.
McChesney has favoured the long end of the market but believes there is now a case for the more medium-term 10-year bonds.
He says: "As sentiment moves in favour of rates decreasing, a larger yield fall might be enjoyed. Concern and uncertainty over the governments' move on the national debt payback is also an argument for leaning towards 10-year US Treasuries.
"The 30-year end of the market will become more suitable when the US has a handle on its programme of Treasury buybacks."
Inflation has been well-behaved and is not impacting too strongly on the outlook for the bond market at the moment, Geikie-Cobb says, adding that while inflation looks benign he does not foresee a fall.
McChesney adds: "Bond yields discount future inflation so if there is concern over a rise, then longer date bonds allow for it by yielding higher and dropping prices. When sentiment improves and expectations are for a lower economy, bond yields lower and prices rise.
"High inflation does not seem to be seeping into any area other than oil. Greenspan has been suggesting the technology revolution is a positive factor for inflation. Increase in productivity regarding technology indicates the economy can survive with high growth."
According to McChesney, the ideal election outcome from a bond point of view would be to have a democratic president and a republican congress.
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