Aegon’s fixed income team has been utilising a number of sovereign debt pair trades in its Strategic Bond fund to take advantage of an uneven global recovery.
Managed by David Roberts and Phil Milburn, the £281.7m Strategic Bond fund has a number of short positions in debt from countries experiencing a strong recovery and which are likely to face rising interest rates.
The managers have mitigated the shorting risk by pairing the positions with debt from slower-recovering governments.
In its most recent deal, the team opened a 7.5% short position on Canada – paired with a long position in Germany.
The deal follows a similar cross-market trade between Australia and Sweden earlier this year.
Before the position closed at the end of March, the 10-year Canadian bond fell by 0.5%, while the German bund rallied by almost 1%, resulting in returns from both legs of the trade.
“We took quite a negative view on the Canadian bond market because, as with Australia, their growth is so closely linked with commodities they are further along in their recovery,” Aegon fixed income investment manager Colin Finlayson says.
“We saw there was a risk that, with consecutive quarters of good positive growth, the central bank might have to raise rates sooner rather than later, so we felt this was a market to play from the short side.
“Growth in Europe is nowhere near as robust as we are seeing in places like Canada, Australia or the US,” he adds.
“It is very much driven by Germany, but it still is not quite posting the numbers a lot of people expected.
“You also have ongoing concerns in Southern Europe and every time there is a negative headline on Greece their bonds fall and German bunds rally.”
Finlayson says they do not currently hold any other sovereign debt pairings, but adds the team is constantly looking to take advantage of markets where there are fundamental differences in the recovery cycle and the potential for interest-rate hikes.
“As long as you avoid the potential landmines such as those in southern Europe – where you are taking a lot more credit risk than any government bond trade really should – and confine yourself to liquid and strong AAA-rated markets, it is quite a low-risk trade to put on,” Finlayson adds.
“To be long Europe/short Canada – two AAA-rated issuers – the credit risk is very low, yet there are good opportunities to make absolute returns.”
