Cowley: Bond market rally is in its death throes

OMAM’s Stewart Cowley has said the global bond market is in the last throes of a rally, even as the Federal Reserve looks to cut yields via Operation Twist.

The group's head of fixed income said the Fed's plan to buy $400bn of longer-dated treasuries by June 2012, while selling an equal amount of short-dated bonds in order to flatten the yield curve, was "the latest in a series of increasingly desperate acts" and one which would have a limited effect.

Cowley had started shorting the US treasury market at the start of this year but moved his £497m Global Strategic Bond fund to more of a "classic" bond fund position, saying he had been forced to change his thinking following summer's tumultuous market movements.

Benchmark 10-year US treasury yields fell to a record low of 2% in August as equity markets tumbled and have since touched fresh lows of 1.67% on 23 September, two days after the Fed announcement.

Today the 10-year yield stands at 1.85%, while the 30-year treasury yield is at 2.82%.

Cowley has now begun to move away from his longer duration position in the expectation the Fed will struggle to suppress yields.

"The benchmark for how this process can go is Japan. A look at the comparative yield curves would say that in the target maturity range (above six years) there is 'only' some 0.8% to go before this happens", Cowley said.

"Given the speed at which markets are moving, this could happen in a matter of days at which point the global bond market rally is effectively over."

A different metric - comparing the shape of the yield curve with the creditworthiness of the US and Japanese bond markets using credit default swap values - suggests there is just 0.2% worth of movement left before the process is over, according to Cowley.

"Either way you look at it, this is a bond rally that is in its last throes. For that reason we are scaling back on our duration positions in the US as the market continues to rally," the manager said.