Fixed interest portfolio managers believe the US economy will need further interest rate rises to en...
Fixed interest portfolio managers believe the US economy will need further interest rate rises to encourage a slowdown.
The latest GDP figures at the end of last month showed annualised growth in the second quarter of this year was running at 5.2% while the market was expecting a figure of around 4%.
Perpetual believes that further interest rate rises of 0.25% or 0.5% may be needed to take the heat out of the economy and calm any inflationary pressures.
Paul Causer, joint head of fixed income at Perpetual, says: "The economy in the US is very strong and there is no strong evidence it is slowing down. Inflation is fairly muted apart from energy prices although our view is that the economy needs to be slowed down. The interest rate rises that we have had are starting to bite but the Federal Reserve may need to do a bit more.
"We have skewed our weightings towards the long end. The US bond market is now being pushed by two dynamics the economic fundamentals and also the fiscal dynamic."
He adds that the US bond market is following the pattern of the UK gilt market, with low issuance and strong demand for government debt leading to an inverted yield curve.
Douglas Roberts, investment director, fixed interest at Standard Life Investments, says: "For quite a few years now people have been saying that the US economy is going to slow and it has not. But the rise in oil prices and increases in interest rates are probably working to slow the economy down. We currently have real interest rates of around 4% and maybe that level was sufficient to calm the economy in the 1970s and 1980s it is probably going to take a bit more than that now.
"If one looks at the environment for the US bond market it is not a particularly bad. Inflation is low in historical terms and because of the long growth cycle we have got very healthy public sector finances."
Causer is favouring 30-year US Treasuries which are offering a yield of 5.79% and believes that there could be upside in the US bond market if the economy starts to calm faster than expected and the market starts to price in interest rate cuts.
Roberts believes US Treasuries are not particularly good value on a historical basis and Standard Life Investments is neutrally weighted.
He says: "Ten year bond yields are around 6%, inflation is around 2.5%, giving a real yield of 3.5%.
"Over the last 15 to 20 years, real yields on 10-year US Treasuries have been between 3% and 4.5%. US Treasuries at the 10 year end look as if they are fairly valued they do not look like a screaming buy and they do not appear to be a screaming sell either."
Roberts is underweighting the short end of the yield curve in the belief that interest rate expectations are set to deteriorate which would be a negative for this area of the market.
One year US Treasuries are yielding around 6% while three year US government debt offers a yield of 6.3%.
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