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Why QE ending and rates rising can be good news for bonds

Why QE ending and rates rising can be good news for bonds

The end of quantitative easing in the US and a possible interest rate tightening is positive for the long end of the high-quality bond market, according to Stratton Street Capital’s Andrew Seaman.

‘As long as the Fed is ahead of the curve, it will be positive for the market,' said Seaman, who co-manages the New Capital Wealthy Nations Bond fund with Moz Afzal. 'As long as inflation expectations are kept in check, the long end of the bond market will perform very well.'

‘The Fed has been tightening policy before inflation picks up, reducing inflation expectations at the long end, which causes yields to fall. That’s how we are positioned in the wealthy countries,’ he added.

‘The last three tightening cycles have been characterised by outperformance of the long-end and high grade bonds, hence the fund’s exposure to single A, longer-dated bonds.'

The $899 million fund's modified duration is 7.7 years, according to its September factsheet.

The New Capital Wealthy Nations Bond fund is run by EFG Asset Management (EFGAM), and sub-advised by London-based Stratton Street Capital, where Seaman is chief investment officer and portfolio manager. The New Capital range of funds are managed by EFGAM.

Big bet on Asia

One of the big changes in the fund over the past year has been increased exposure to Greater China.

‘The exposure to China and Hong Kong has increased to 24.7% from 17.6% over the past year as issuance in that region has increased markedly,’ Seaman said.

One recent issue, he noted, was China Travel Services, a Hong Kong travel agent, which sold $1 billion of dollar bonds recently. The offer was oversubscribed nine times, according to media reports.

‘That issuance was triple B credit, while most of the other credit we have invested in are single or double A. These issues have pretty attractive spreads,’ added Seaman.

Apart from east Asia, the other region Seaman is optimistic about is the Middle East.

‘Most people assume that investing in these countries is not a great idea, mainly because geographically, they are close to problem areas. But if you look at the underlying credit, most of the issuances are single A or double A,’ pointed out Seaman.

‘In an environment where the Fed is tightening policy, the safest credit often turns out to be from the Middle East. Historically, the fund has had a high exposure to the region, mainly due to valuations but also due to the high credit quality. The average quality is single A and the average size of the issuances is about one billion dollars,’ he added.

Seaman’s exposure in the region is mainly in dollar bonds in Qatar, Bahrain, Saudi Arabia, Abu Dhabi and Dubai in the UAE.

The Middle East and east Asia account for 54% of the fund's holdings by net asset value, according to the latest factsheet.

For the three years to October 2014, the New Capital Wealthy Nations Bond fund has returned 25.48%, while the Citywire benchmark Citi WGB (Hedged USD) TR gained 12.8% in US dollar terms.

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