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'Trump gap' led Fed to scale back rate rises, says Jupiter

Jupiter bond veteran Ariel Bezalel says Federal Reserve not worried about US over heating as president unlikely to get policies passed.

'Trump gap' led Fed to scale back rate rises, says Jupiter

Jupiter bond fund manager Ariel Bezalel is starting to raise interest rate exposure in his Jupiter JGF Dynamic Bond fund after the Federal Reserve last week indicated it would not raise US interest rates as quickly as had been anticipated.

Speaking at Jupiter’s annual investment dinner last week, Citywire A-rated Bezalel said he had slashed 'duration', a measure of interest rate exposure, ‘pretty aggressively’ by taking it to a low of one year last year.

Fixed income bonds tend to lose value as inflation and interest rates rise. A bond portfolio with duration of one year would fall 1% if interest rates rose by 1%.

Bezalel said he had now lifted duration to 3.3 years even though US interest rates rose last week. As expected the Fed lifted its funds rate by 0.25% to a range of 0.75-1% but also said it expected to raise rates just twice more, rather than three more times, throughout this year.

'We are looking at certain things which tell us that maybe the US isn't as hot as people make it out to be. If anything we have seen a tightening in lending standards in the United States, while we are seeing a growth in the money supply beginning to roll over a bit,’ Bezalel said.

The fund manager said he was responding to movements in US government bonds, or treasuries, whose price had risen as their yields slipped in response to the perceived slower pace of monetary tightening.

'So there are some things that tell us that, with the back-up in US treasury yields we have had, it's really time to lengthen duration. We think US treasuries are starting to look like reasonable value once again.'

In August 2016, Bezalel sold out of 20- and 30- year US treasury bonds, which reduced duration in the portfolio from six years to 4.5 years.

According to the latest available fund factsheet, the effective duration in the fund at the end of January was 1.13 years. The top holding in the fund is US treasuries at 4.3% and Bezalel has an 11.6% long geographical allocation to North America.

Scope for disappointment

Bezalel (pictured) said the Fed was unsure about what President Donald Trump would do and this was their reason for reducing the amount of planned interest rate hikes.

Bezalel also said investors should be aware that Trump may not keep his election promises.

‘The other thing I am concerned about, is that we are heading towards what I am calling a "Trump gap". We are getting to a period where between now and when Trump has to deliver. My concern is that there is scope for disappointment,’ he said.

‘I think it is highly unlikely that he is going to get his trillion dollar infrastructure spending plan through. I think that is going to be watered down. There is even talk that on the tax reform it will be pushed back to next year.’

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