Strategic bond investors have been reducing their allocations to risky parts of the market and cutting duration further as global government bonds sold off last week, as they await an opportunity to buy back in when prices bottom out.
The week following Donald Trump's (pictured) victory in the US Presidential Election saw treasury prices tanking, with benchmark 10-year yields spiking to 2.2% by 17 November from 1.9% prior to the election; their biggest weekly move since the 2013 taper tantrum. Meanwhile, 10-year gilt yields rose from 1.2% on 8 November to 1.4%.
Emerging market debt was also hit by Trump's win, with the Bloomberg USD Emerging Market Sovereign Bond index down more than 4% since the election to 157, as his policies are expected to have a negative impact on the region.
Trump is set to boost fiscal stimulus by some $1trn and increase infrastructure spending, which is likely to fuel inflation and strengthen the US dollar, while also increasing the country's deficit.
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Meanwhile, investors are expecting the Federal Reserve to begin tightening monetary policy again at its December meeting, with further rate hikes expected next year, putting pressure on the long end of the yield curve.
Short duration
Christine Johnson, head of fixed income at Old Mutual Global Investors, said both the £174m Global Strategic Bond and £127m Monthly Income Bond funds had been very short duration for the last two months and the team has also reduced risk exposure as they wait for the sell-off to create renewed opportunities.
"We have toned everything down in emerging markets and credit, because once real yields start rising it is almost certain it will have some sort of risk-off effect," she said.
"We are waiting for this to be priced in. It will probably be overdone, and the dollar will also peak, and at this point we will take off our long dollar position and [replace it] with emerging market currencies."
Jupiter's fixed income manager Ariel Bezalel said his £3.2bn Strategic Bond fund recently benefitted from shorter duration positioning, which was cut from above five years to 2.6 years in August.
Meanwhile, Bryn Jones, manager of the £68m Rathbone Strategic Bond fund, has taken down the fund's EMD exposure from around 10% to "a few percent" and increased his cash weighting to 7.4%.
"We still think strategically that emerging markets look quite attractive longer term, but tactically we are not sure what the implications of US policy will be," he explained.
His fund is also underweight duration, but he is watching yields on 10-year gilts, with a view to buying if they spike to 1.64%.
