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Pound faces 'quiet crash' warns Cowley

Old Mutual's veteran bond investor is reducing his sterling exposure, shorting gilts and adding inflation protection.


by Matthew Goodburn on Feb 15, 2013 at 07:11

Pound faces 'quiet crash' warns Cowley

Veteran bond fund manager Stewart Cowley has warned that the British pound is likely to come under sustained pressure as the interest payments needed to service the UK's public debt start to spiral.

The Citywire A-rated fund manager says the UK's currency faces a 'quiet crash' as it loses its safe haven status as macro worries ease, and the market refocuses on the UK's debt and growth issues

So far this year the pound has been hard hit, falling by 4.4% against the US dollar and 6% against the euro.

Cowley, who manages the Old Mutual Global Strategic Bond fund , a Citywire Selection pick, warns that with inflation continuing to rise, servicing the UK's budget deficit is also set to get more expensive.

'The rate at which interest payments by the UK government are rising is alarming. It is £50 billion now and it will be £52 billion by 2014. But if we continue to run the deficit at £150 billion, with gilt yields at 2% that deficit very quickly goes above £75 billion.'  

To counter this, he has been reducing his sterling exposure, shortening his duration (which measures exposure to rising interest rates) on corporate bonds and has taken out short positions against UK and US government bonds as well as against Japanese and French sovereign debt. 

Around 4% of the £870 million fund has also been switched into US dollars 'because it is not the pound' while index-linked bond exposure has been increased evenly between US and UK inflation linked bonds to deal with the inflationary environment. Exposure to the euro has also been increased although Cowley remains 'agnostic about which currency will win against the sterling'.

US and Japan control the euro

Cowley thinks the euro's steady rise in recent months has also been overlooked, but that ultimately it will be the US and Japan that will 'dictate' the end of the euro's strength when quantitative easing and attempts to devalue their own currencies end, although there is little sign of that happening for some time.

He said: 'A lot of people wrote off the euro but we always said that once there was a credible backstop [which came with Mario Draghi's comments last summer] we would invest. Since the market has swung away from safe havens it has brought sterling down because we have fundamental problems with our own economy.'

'The G7 said it would not have a currency policy which allows the euro to continue to rise. While the US and Japan will dictate its end, the US shows no signs of stopping QE and Japan is devaluing its currency.'

Sell gilts

With the Bank of England continuing to indulge in what Cowley terms 'pure electronic money creation' he believes that inflation is already ahead of the official headline numbers, and that investors are sleepwalking into losses as they hold on to gilts that are losing them money in real terms.

He said: '[UK] Inflationary expectations have been rising since July and we have had 38 months of missing our [2%] inflation target. People should realise inflation is already here and official figures do not reflect ordinary people's experiences.'

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5 comments so far. Why not have your say?

mark douglas

Feb 15, 2013 at 16:11

How did he short French Gov. bonds?

I've already shorted US treasuries via an ETF,symbol TBF.

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Alan Tonks

Feb 15, 2013 at 17:48

Well we can get our wheelbarrows ready, or jump from the tallest building we can find.

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Robert McIlroy

Feb 15, 2013 at 22:05

q.v. Common Misunderstandings on Covexity and Duration Timothy Falcon Crack and Sanjay Narwalkha

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Anonymous 1 needed this 'off the record'

Feb 15, 2013 at 22:34

q.v. Common Misunderstandings on Covexity and Duration Timothy Falcon Crack and Sanjay Nawalkha

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Feb 16, 2013 at 16:43

XUGS is a good way to leverage X2 10 year gilts

Mark a good play on TBF, I'm long of this as well as XUGS

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