Hill Samuel Asset Management is favouring US Treasuries in the 15-year area of the yield curve with ...
Hill Samuel Asset Management is favouring US Treasuries in the 15-year area of the yield curve with these bonds offering superior yields to 10- and 30-year government debt
The investment house has been buying 15-year US government bonds which are currently yielding around 6.57% compared with 6.04% for 10-year US Treasuries where the group is underweight. This compares with a yield of 6.2% for 30 year US Treasuries
Peter Price, head of fixed interest at Hill Samuel, says the markets are still concerned about US interest rates going up despite the Federal Reserve's decision earlier this month to keep rates on hold. This factor comes on the back of concerns which have been prevalent throughout 1999 that the US economy will continue to grow at a relatively strong pace, as it has done for most of the 1990s
Price says: "The Federal Reserve left rates at the same level but its assessment was on a tightening bias. It said that this does not necessarily mean it will tighten next time although it is a strong signal. The market as a whole is strong in the belief that the Federal Reserve will tighten policy if not in November then some time next year
Price also points to recent US payroll figures which show that hourly wages rose by 0.5% in September. Some in the market are taking this as a sign of increasing inflationary pressures but Price says that he is looking for more evidence of US inflation before making this judgement
He adds: "Our own view is that there is a lack of pricing power around. Consumers have better access to cheaper prices with the internet the obvious source. Core inflation in the US is at around 1.9% and is at its lowest level for many years. Inflation is not a problem. We are also not looking for a rapid slowdown in growth. We think it will be under 3% next year compared with 4% this year. We will be looking for interest rates to stabilise with perhaps one more move upwards
"We are slightly above our benchmark in terms of duration. The market has been too negative over the slowdown in the economy. We think the US economy will slow down and that by the end of next year we will be in a flat environment for interest rates
Ken Robertson, fixed interest fund manager at Scottish Mutual, says that there is a lack of liquidity in the US bond market and that it is not the right time to be taking large bets. But he adds that Scottish Mutual is looking at slightly lengthening the duration of its bond holdings. He says: "The long-end of the bond market is going to be reasonably well-supported. The inflation problem in the US is more a problem of perception not reality - bond markets are very nervous animals. But market liquidity has just dried up with bankers, investment bankers and market makers cutting their proprietary positions and investors seeming to be disinclined to take any really proactive stance
There is also less activity in the US bond markets than earlier in the year, with many bond investors having taken their bets on weightings in previous months
The lack of liquidity in the US market is also being mirrored in the UK where the Government is issuing less debt than it has done in the recent past
Robertson says that many in the market are cautiously waiting for more news on the extent of any monetary tightening by the Federal Reserve and there is caution among bond investors over the uncertain impact of the Millennium Bug
By Leo Bland
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