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View the article online at http://citywire.co.uk/wealth-manager/article/a745633

Kames' $50bn bond boss: my yield curve taper trades

by David Campbell on Apr 10, 2014 at 13:52

Kames' $50bn bond boss: my yield curve taper trades

Kames head of fixed income David Roberts has upped conviction in the core trade he believes will benefit as the US Federal Reserve tightens rates, going short US five-year Treasuries versus 30-year.

He pointed to a historical pattern of the US five year Treasuries giving up around 200 basis points (bps) through periods of policy tightening, while the 30-year tightens on downgraded expectations of future growth.

‘It’s not rocket science,’ said Roberts, who is ultimately head of around $50 billion (£30.11 billion) in fixed income at Kames. He is also co-manager of the Kames Strategic Bond fund with Philip Milburn, and the Kames Sterling Corporate Bond fund with Citywire A-rated Iain Buckle.

Roberts has doubled down on his conviction in yield curve flattening since incoming Fed chair Janet Yellen surprised many investors with her hawkishness on the future path of rates in March. Her truncated schedule for a first increase in rates, now scheduled for the second quarter of 2015, has already knocked the US five-year Treasuries.

Pivotal moment

‘I think we will look back on that meeting, and the press conference that followed, as a pivotal moment,’ Roberts said. ‘The difference [between short and long duration] is huge in yield terms, around 1.7% versus 3.7%.

‘When you have that massive spread, curve tightening is going to deliver around 10% in capital loss at the short end while you continue to clip the coupons at the long end. We already have [Federal Open Monetary Committee] members saying rates should be at 4% within the next few years.’

He pointed out the Fed seemed to be more aware of the downside of continued liquidity than the upside, as a series of asset classes continued to hover around record highs.

Recent Fed commentary has highlighted the exit from the last easing cycle, when rates rose throughout 2004 to 2006, as the period when bubbles started to appear across the economy.

Roberts said this was less of a worry now, given the relative clear-out of leveraged capital, but there was little room for manoeuvre in razor-thin credit spreads and sovereign losses at maturity.

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