Bond firms set to cut fund duration

Bond managers are cutting the duration on their funds in anticipation of an uplift in the UK economy towards the end of the year.

Henderson head of fixed income John Pattullo, who manages the £1.1bn strategic bond fund, says he expects to move to a one-year duration within two years. He says: “The duration is four years at the moment and I may cut it because one-year bonds have rallied. I am thinking of adding shorts but I need the economic data to improve.”

Old Mutual Asset Management head of fixed income Stewart Cowley, who runs the £491m global strategic bond, says: “We were very long duration last year and this year we have negative duration of minus two to minus four years.”

Managers use negative duration, with tools such as futures, in anticipation of a rise in interest rates. Bond traditional yield-price ratios are reversed and the price rises as interest rates go up.

Cowley says bond yields cannot fall for ever and this app-roach will pay off in the second half of 2011 and the start of 2012.

Standard Life head of credit and aggregate Andrew Sutherland, who runs the £88m strategic bond fund, says: “We have cut duration by 20 basis points from 7.5 years this month.”

Sutherland says he may consider cutting the duration to five years.