Kames’ Buckle reduces interest rate risk after ‘drug addict’ reaction to QE tapering

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Kames Capital fixed income manager Iain Buckle has reduced his underweight in interest rate risk following the market’s “drug addict” reaction to the possibility of QE tapering.

The manager of the £523.2m Kames Capital Sterling Corporate Bond fund describes the extreme moves in the gilt market sparked by the mere mention of tapering as “excessive”.

He says: “Investment markets’ reaction to the possibility that we are approaching the end game on US QE is akin to a drug addict facing up to being weaned off their chosen poison.

“The Federal Reserve isn’t about to make investors go ‘cold turkey’, but when you’ve been used to something that eases the pain, even the thought of having to give it up at some point causes you to act in irrational ways. The violent moves in all markets during June are testament to that.”

In particular, Buckle says the reaction in the UK market was “intriguing”, given that the UK has “consistently lagged” the US. He says: “Monetary policy in our economy will need to remain very accommodative for some time.

“I do think we are on an upward trajectory for market interest rates, but the extreme moves in the gilt market on mumblings of tapering from the Fed seem excessive.”

The subsequent rise in gilt yields has prompted Buckle to gradually reduce the fund’s underweight position in interest rate risk, in the hope of finding a better entry point to reinstate it.

Buckle also details that the fund has been reducing its bias towards 30-year bonds, sparked by the “significant relative outperformance” of very long-dated bonds, as part of the gilt market sell-off.

As a result of this move the fund  reached a “broadly neutral” duration position compared to its peers by the end of June, says Buckle.

New holdings were added and existing positions were increased as credit spreads widened, bringing about a “small increase” in the fund’s overall credit risk exposure.

The fund took on new positions in bonds from the UK & Irish businesses of The AA and Lunar Funding. Existing positions in subordinate bonds from Liverpool Victoria and secured bonds from CGIS Group were also added to.