The volatility of the bond market in recent weeks has created trading opportunities, fund managers a...
The volatility of the bond market in recent weeks has created trading opportunities, fund managers agree. However, April La Russe, director of UK and international government bonds at F&C, says: "Globally the background for government bonds is not that upbeat in that the interest rates of most of the major economies, excluding the US, are going up. It will be hard for the bond markets to get really excited until interest rates start to come down."
As a result, LaRusse's team has focused on shorter, more tactical trades. He says: "We have put on investments which have been both long and short duration because the markets have been quite volatile."
Craig Shute, fixed income portfolio manager at London & Capital, has also taken advantage of the volatility through using futures, which are highly liquid and have very low transaction costs. Shute went long on short-dated US interest-rated bonds and sold off longer-dated US interest rated bonds, a tactic which has paid off for his portfolio as short-rated bond yields fell.
However, the turbulence has also meant fund managers need to focus on safeguarding their capital. Shute has been buying credit protection where necessary to protect the capital of his investments, for example, through buying index-level credit default swaps, linked to the iTraxx crossover, as well as name-specific credit default swaps. "We think about the hedge ration we would like to employ and decide on a spread level we think is appropriate. If the credit spreads then widen, we will make money which will offset what we lose on our underlying bond portfolio," says Shute.
Most fund managers agree it is the sub-prime issue in the US that has caused the recent flight to quality. "The US economy is at a point where it is difficult for forecasters to understand whether a steady rate of growth is going to be experienced by the US or whether the problems in the sub-prime housing sector will spill over into the broader prime markets and further into other areas of the economy," says Shute.
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