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'Get out' of UK gilts and German bunds, says Thames River's Thursby

Thames River Global Bond managers Peter Geikie-Cobb and Paul Thursby are shorting UK gilts and bunds, arguing the gilt and bund market is 'going to go wrong and quite quickly'.

'Get out' of UK gilts and German bunds, says Thames River's Thursby

A bubble in government bond markets is on the brink of bursting, say Thames River Global Bond fund managers Peter Geikie-Cobb and Paul Thursby who are shorting UK gilts and German bunds and recommend investors sell out.

Many investors have put their money in low yielding UK and German government bonds as they believe these will serve as a 'safe haven' from other more risky assets. But Geikie-Cobb and Thursby, who are well known for taking high conviction bets, compare current market conditions to 2006-07 when they felt the credit bubble was getting over-extended – a call that was correct, albeit slightly early.

‘The point is when it does move it is going to be pretty catastrophic and if you haven’t got the position on when that happens, will you be able to jump on the band wagon? Probably not,’ Geikie-Cobb says.

‘As the 2008 example taught everyone, liquidity was very poor and markets shut down. Here we are in an environment where liquidity is pretty poor anyway across most asset classes.’

Germany pays

On bunds, Geikie-Cobb added that it was dependent on which way the eurozone crisis goes – although they anticipate an overarching theme: ‘Either way Germany pays, so the fact that German bund yields over the last few months have lowered to a 1.2% yield and currently 1.4%, they are clearly priced for deflation and low growth across Europe, but they are also priced as a safe haven.

‘We would doubt that Germany under an Armageddon scenario is a safe haven. If the market is correctly priced for deflation and slump then the core markets – Germany, US and the UK – have a solvency problem.

‘If on the other hand, policy-makers manage to save the day and there is an improvement in the outlook for growth, then negative real yields are completely inappropriate and you get a correction on an environment where global growth returns to a solid footing.’

Thursby added: ‘What manager is saying “today, get out”? They are all saying there is no value, it is going to go terribly wrong but no-one is recommending getting out – except us. We are saying we are short. Not only is there no value here but it is going to go wrong and quite quickly, and you need to be out.’

Cheap insurance

In fact, Geikie-Cobb describes the decision to be short bond yields as ‘cheap insurance’, with their central mission to protect the capital of the fund in preparation for a correction.

Although being early has hit performance over the past year – contributing to a 3.4% loss over the 12 months to the end of June while the Citigroup WGBI index rose 5.1%, according to Lipper – the duo say most of their clients understand what is driving their current thinking. Over the past three years the fund is up 5.5%, while the index rose 22.8%.

The managers’ views contrast with Henderson Strategic Bond fund manager John Pattullo, who is allocating to gilts and argues they have longer to go.

The Thames River pair also see inflation as a serious oncoming threat, pointing to rising government debt levels, wage inflation throughout the world, and the consequences of several bouts of quantitative easing in the US and UK, which they say will lead to a spike in yields. They also describe rising deposit bases as consumers deleverage as a ‘stored inflation fuel’ if sentiment does eventually turn.

‘Your stored inflation fuel – we know it is in the monetary base – is sitting there waiting for a signal from politicians or whoever to mobilise, so the inflation danger grows by the second,’ Thursby said.

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6 comments so far. Why not have your say?

Craig Taylor

Aug 21, 2012 at 17:02

Looks a good call the reward for investing in UK bonds looks well short of compensating for the ensuing risk given all the QE which has taken place

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Geoff Downs

Aug 21, 2012 at 17:12

Just think they are plain wrong on Gilts and inflation.

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Aug 21, 2012 at 18:18

No-one ever talks about inflation-linked gilts in these doom-laden pieces about government bonds. Since no-one can agree whether we about to have deflation or rip-roaring inflation, they seem a reasonable bet either way. Obviously a good place to be if inflation takes off, and not horrific if we get deflation. Interesting to note that some of the smarter fund managers who avoided the 2008 mess are happy to hold inflation-inked gilts at present.

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Aug 21, 2012 at 20:46

Well done chaps. Having driven your portfolio upwards by 5.5% over the last 3 years you clealy know what you are talking about. The Legal & General over 15yr gilt index total return is up 47% over 3 years. Even if these boys are right they need a collapse of over 30% just to break even. Clearly I'm hanging on every word they say. I presume their 3 year remuneration is as pathetic as their performance.

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Geoffrey Ashby

Aug 22, 2012 at 10:16

Whatever money the BoE or ECB chuck into the Market, any positive growth effect has to be temporary - because the increase in demand will quickly vanish and of course, Osborne needs to decrease borrowings sooner than later which has an opposite` effect. Therefore, taking only UK Gilts surely the probability is that Mervyn King and cohorts will attempt to reduce interest rates further - the Bet on holding certain Gilts has to be Capital Gains rather than just safety.

Why cant people see that UK and increasingly most of Western Europe is bust because of Free Trade and no protective Tarrifs and Quotas. We need them sagainst former Eastern Europe copuntries as well - and the irony is that it is mainly UK businesses which are taking mass employment work overseas.- obviously too late to do anything major because of upsetting our paymasters, China.

A difficult one, inflation will rip only if Banks give easy credit again but on balance I tend`tro agree that reduction in Gilt holdings is wise advice and gains` tax`free! But what dsoi we do with the funds` released - what about US Stocks as a` hedge on the pound` as well?

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Robeson de Vert

Aug 23, 2012 at 14:45

Logically, Geikie-Cobb and Thursby's reasoning can only be 100% correct. The more important issue is a question of timing. I see little evidence that their timing is correct, judging by this article. But I see little evidence that their timing is wrong either. In fact, I suspect it would be almost impossible to provide as precise a time frame as the one G-CT seems to be implying it has in mind. Such a position as theirs therefore becomes a bet not on whether we expect the fixed-income bubble to burst [everyone does] but rather it's a bet on how much longer the rally can last. Such a bet is also a cost/benefit wager vis-a-vis ROI and COC employed. What should also discourage many players in this area is the fact that too much of the risk [to my mind] is still endogenous.

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