Colin Harte, the manager of the Baring Global Bond and Absolute Return Global Bond funds, is “not terribly enthusiastic” about bonds and has also called for the Global Bond sector to split.
Harte adopts special strategies to try to make money even if his outlook for the global bond market is negative. He says investors need to adopt “a bit more of a trading mentality” in the current environment, where he says stagflation risks damaging fixed income.
“I can’t say I’m terribly enthusiastic on the asset class. There’s a lot of good news built into it. Inflation will prove stickier than people think. There’s not as much market-making capacity as was previously the case. There’s more volatility on an intraday basis. A bit more of a trading mentality is needed,” he says.
Harte says the global bond sector now contains a large number of different strategies and should be sub-divided into several sub-strands.
“Short-dated bunds have no value if inflation creeps up”
His two funds are reducing their sensitivity to interest rate rises in response to concerns about inflation as the recovery takes hold, which may prompt interest rates to increase.
He stands to gain in his Absolute Return Global Bond fund if interest rates go up and is looking to reduce his sensitivity further in his Global Bond fund.
He is short gilts and bunds as he says they will currently not compensate investors adequately if inflation and interest rates rise.
“Short-dated bunds have no value if inflation creeps up,” he says. (article continues below)
Despite this, he says yields could even go down temporarily in shorter-dated bonds as investors focus too little on inflation risk.
“Yield curves could actually steepen sharply because inflation expectations become unanchored,” he says.
Harte is also short the yen, as he says Japan could print money to monetise its gigantic debt burden and create inflation in the economy.
“There’s a danger the Japanese adopt quantitative easing and an inflation target. We’re sending quite a strong message we don’t like yen,” he says.
Another hedge against inflation are the currencies and bonds of commodity-rich countries, which stand to benefit if commodity prices inflate.
Of the commodity currencies, Harte is short the Australian dollar and has sold out of provincial Australian bonds, but has rotated into Norwegian and Canadian debt.
He is also long Asian currencies against the dollar in a longer-term bet those currencies will appreciate.
The Chinese have already started letting the renminbi appreciate against the dollar. Investments into other fast-growing Asian countries may also help other currencies in the region rise.