View the article online at http://citywire.co.uk/money/article/a611767
'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'.
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 paysOn 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.’
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 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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