View more on these topics

Road to redemption

Bonds have an inbuilt ability to sidestep market calamities and recover lost ground

There has been a higher than anticipated decline in economic activity and future expectations but not quite enough to tip Japan, Switz-erland, Germany, the US and the UK into a full recession.

The core bond market response, as seen in bond futures, has been excessive, pushing interest rate expectations for the above countries to extremely low levels for many quarters to come.

With the exception of Japan, inflation and inflation expectations have been sticky, not declining as much as some central bankers hoped. This combination of low bond yields and stubborn inflation creates unappealing prospective real yields.

Conversely, the extent of credit spread widening, especially in single name credit default swaps, has not been as aggressive as might have been expected, given macro fears and equity market swoons. The JB absolute return funds are built to withstand a major calamity. What we have seen so far is a change in relative bond prices.

However, there is a bright side to these market moves, courtesy of the key attribute of bonds – the pull to redemp-tion. If the incidence of actual defaults remains as low as it is now, it is likely the bonds will recover that lost ground and boost future returns. If there is an increased incidence of defaults, JB absolute return funds are well positioned to protect from such calamitous events and could even benefit from them.

The current market feels like the fourth quarter of 2008 but at about one-third of the intensity. At that time, the JB absolute return funds, like many others with credit positions, suffered before retracing much more than the ground lost within six months.

To profit, not just recover, from the current unexpected turn of events, funds need to capture the twin reconver-gence themes, first within European government debt and second between corporate bonds and underlying gov-ernment bonds, that have been surprisingly re-offered to us.

This will entail accurate timing of the switch out of expensive core government paper into beaten-up bonds.

Two bits of good bond news in the gloom are Autonomy 3 per cent due 2015 convert-ible bonds and Bank of America bonds. The bid by HP has pushed the Autonomy bonds up by 43 per cent in price terms and the $5bn investment by Berkshire Hathaway into Bank of America preferred shares has renewed buying interest in Bank of America bonds.

We have not made any big portfolio changes. On the government bond front, we have cut short-dated US Treasury inflation-protected securities, sold short interest rate futures in Australia and Canada, established bearish trades in German debt via options and sold some long bond futures in the US.

Modest changes of the non-government side include reducing the equity hedge on our convertible bond strat-egies as equity index levels have declined, profit-taking on selected credit default swap widening and the addition of value trades such as HSBC senior Yankee debt at Libor plus 175 and further Bank of America debt at Libor plus 450.

We have also added more credit protection in US commercial mortgages as well as purchasing US non-agency mortgage-backed securities.

Tim Haywood is co-fund manager of the JB absolute return bond, absolute return bond plus and absolute return bond defender at Swiss and Global


Barking about ringfence bite

Ringfencing the retail operations of the UK’s biggest banks could make mortgages more expensive but brokers feel firewalls should be in place. On September 12, the Independent Commission on Banking, led by Sir John Vickers, is expected to recommend that banks should ringfence their retail arms. The proposal has the support of the Govern-ment, with […]


Claim council hits out at creation of rival body

The Claims Standards Council has hit out at the creation of a rival trade body for claim management companies. Last week, claims management company Brunel Franklin announced it has resigned from the Claims Standards Council before revealing it helped to set up a rival trade body to be called the Association of Professional Claims Managers. […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm