The prime time to snap up short-term bonds looks to have passed, says M&G’s Jim Leaviss, although it is still too early to tell whether US Treasury yields have peaked.
Leaviss, who is lead manager on the M&G Global Macro Bond fund, said expectations for 10-year Treasury yields have risen and are still expected to go further.
‘The sell-off in US Treasury bonds has already been severe. Ten year yields have risen from a low of 1.4% in July 2012 to nearly 3% today. Most street strategists have yields rising further in 2014, with the consensus 10 year forecast at 3.37% for a year’s time,’ he said.
However, pointing to FOMC expectations, Leaviss said the term premium – the difference between yield-to-maturity between long and short term bonds – may no longer be sufficient to justify positions in short-term bonds.
‘Four FOMC members think that that the long run Fed funds rate is as low as 3.5%, and two think it is as high as 4.25%. The median expectation is 4%,’ he said.
‘If the FOMC members are correct that 4% is the long run interest rate, then, if the term premium is zero, the 10 year forward rate at 4.13% has already overshot where it needs to be.
‘And, if that is so, we should be closing out our short duration positions in the US bond markets.’
Leaviss, who is head of retail fixed income at the firm, suggested bond investors approach the market cautiously with a number of factors still largely undecided.
‘We also know that markets tend to overshoot in both directions. Nevertheless, whilst it’s too soon to say that we’ve seen the highest yields of this cycle, as a value investor you could say that yields are moving towards fair value.’
The M&G Global Macro Bond X fund has returned 18.6% over the three years to the end of November 2013. Its Citywire benchmark, the Citigroup WGBI TR USD, fell 6.59% in US dollar terms over the same period.