Threadneedle's AAA-rated Fitzsimmons on how to play flatter yield curves

Threadneedle Absolute Return Bond  fund manager Quentin Fitzsimmons is positioning his portfolios for a flattening of the yield curve in the months ahead as investor demand for higher yields continues to grow.  

Citywire AAA-rated Fitzsimmons (pictured), told Citywire: ‘Fed rates are clearly on hold for some time, and investors will be forced into looking for greater yields which has helped credit markets.

‘From a strategic point of view, we want positions that can access flatter yield curves and which will pay off through the cycle.’

Fitzsimmons expects many others will try to put similar positions on which could lead to yield curves steepening again, but he thinks exposure to flattening yields curves is currently essential.

‘Thirty year treasury yields were at 4%. We are talking 100-200 basis points flattening which fits with much slower economic growth ahead and we don’t see inflation as a problem.’

High Alpha potential

Fitzsimmons has taken exposure to the strategy in the UK, the US and some in core Europe.‘The alpha potential from this is high. The Fed slashed rates in 1994, people went longer on the yield curve and treasury yields went down a long way.’

When the Fed started to tighten again Fitzsimmons says that the curve carried on flattening and yields steepened at the front end.

‘Currently yields are so low and demand for growth so acute that eventually inflation may be a problem- but that will not be for some time so exposure to long dated debt will increase because of the need for higher yield.’

Aussie dollar carry trade

Another tactical currency position within the  Threadneedle Absolute Return bond fund, is a short on the South African South African Rand versus US dollar position, which he says is a tactical way of anticipating lower global risk appetite. Fitzsimmons stresses that he is running it with a stop loss ‘in case our timing is wrong’.

He also has a carry trade on the Australian dollar. ‘Australian yields look very high in a world of low rates in developed markets,’ he said, after taking advantage of anti-European sentiment in Australia to buy German government-backed KFWs. ‘This is very liquid, safe debt. Anything European is currently penalised in Australia so we were able to buy these at 100 basis points over 10-year government bonds. In the European market it would be nearer to 20 or 30 basis points over.’