JP Morgan absolute return and head of opportunistic fixed income Bill Eigen says interest rates are “lower than they need to be” in the US, considering the strength of the recovery.
With rates having been made artificially low by the Federal Reserve, Eigen argues that the current improvements in the US market and economy suggest that rates may now also be lower than necessary.
He says: “Rates are not only artificially low, they are lower than they need to be. This economy is recovering just fine here in the US even with slightly higher rates, so all the doomsdayers who said that these markets can’t handle anything above 1.5 per cent 10-year treasuries, that is just crazy to me.
“Economic strength seems to be picking up even more as we speak, we saw the retail sales this week as well as the economic data that has constantly beat expectations over the last few months.”
The JP Morgan Income Opportunity fund remains “US-centric”, on the expectation that the country can continue to beat expectations relative to other markets.
However Eigen also sees “tremendous” value in the current market further down in quality in the high yield market, including European high yield.
He adds: “There are certain parts of the market particularly in high yield trades and commercial real estate that have tremendous value in this market right now.
“You are getting paid a lot more than you should be to own these at this point in the economic cycle.”
The current climate also offers “very cheap” shorts, says Eigen, as well as good alternative and RMB trades.
Towards the end of May and June the fund took off some short positions that had outperformed, including emerging market exposure and other areas of the sovereign market as well as some single names shorts.
However he adds that this is something that could soon be reassessed as markets pick up again: “Now that markets have started to recover we won’t be afraid to put those shorts back on. We are actually looking forward to doing that.”