Schroders' Jolly shorts bunds and treasuries

Schroders' head of global macro Bob Jolly has revealed he is shorting long-dated treasuries and German bunds in the expectation the ongoing economic recovery will reduce demand for safe havens.

Jolly said the group's £91.6m Absolute Return Bond fund - run by managers Bhupinder Bahra and Frederick Bourgoin - is short 30-year debt issued by the US and Germany, in the expectation economic data will continue to improve.

Jolly said: "In the case of duration, places like the US, UK and Germany have basically become expensive because of their safe haven status.

"If we are right and through time the economic recovery continues, it is likely those yields will rise, so we are short US and short German bonds at the very long end."

The move to short US and German debt within the Absolute Return Bond fund chimes with peers, many of whom have made similar calls recently after yields plunged to record lows.

Although yields on some of the bonds have come off lows, they remain below their long-term average.

Jolly added government bond markets have so far maintained a significant risk premium to other assets, but he does not expect this to continue.

"As the world has become a bit more confident, we have not seen the safe haven status of treasury markets reduced. It leaves the sovereign bond markets, especially long-dated bond markets, a little vulnerable to the continuation of better data," he said.

Jolly noted a number of leading indicators suggest yields could be poised to move up - in particular the recent split between housebuilders' share prices and treasury yields, which normally mimic each other.

However, despite his concerns on UK gilt yields, Jolly is not shorting UK government debt because of the growing expectation the Bank of England will embark on a further round of QE.

"The UK also has a lot of headwinds, but the Bank of England is more Fed-like than ECB-like," Joly said.

"It is more worried about an economic decline than an inflation acceleration, and that stems from the fact we have lots of debt, but lots of real assets - such as property and equity."