Insight

Bond Funds Bet on Negative Duration have Yet to Pay Off

“Getting duration calls right consistently is difficult in the fixed income world,” said Ashis Dash, who researches fixed-income funds as an associate director at Morningstar. “One has to time it well to make money out of it.”

Bond funds that have a negative average duration, meaning they are heavily positioned for rising interest rates, are struggling with their positioning.  Why?  Because a perfect storm – including muted core inflation increases and relentless haven flows – has kept a lid on longer-dated developed-market yields.  Trade tensions and a stronger dollar have killed the emerging-market rally, bucking consensus on Wall Street.

Four fund managers:  Michael Hasenstab of Franklin Templeton, Bill Gross of Janus Henderson, Iain Lindsay of Goldman Sachs and Jack Mclntyre of Brandywine Global Investment Management, their funds strategy did not pay off.

  1. Janus Henderson Global Unconstrained Duration: -4 Year
  2. Bentham Global Income: -2.3 Year
  3. Brandywine Global Unconstrained Bond: -1.2 Year
  4. Templeton Global Total Return: -0.9 Year
  5. Templeton Global Bond: -0.8 Year
  6. Goldman Strategic Income: -0.7 Year
  7. Bloomberg Barclays Global Aggregate Bonds: 6.4 Year

The performance as of 2018-08-01 is as follows:

As it turned out, Bill Gross’s fund performed the worst, as it is aggressively positioned with a negative duration of 4 year!

Franklin Templeton – Michael Hasenstab

Franklin Templeton’s bond chief, Michael Hasenstab, who is managing more than $100 billion of bond funds (Templeton Global Bond and Templeton Global Total Return) has been waiting since at least 2016 for his wager — that US rates would return to a pre-crisis normal of sorts thanks to an economic upswing and diminishing monetary stimulus — to come good. He extended the bet earlier this year, primarily using interest rate swaps to push average duration down to a record low of -0.85 years as of the end of March.

In a May interview with Bloomberg TV, Hasenstab predicted rising inflationary pressures, an onslaught of US bond supply and the Federal Reserve’s moves to pare its balance sheet would conspire to drive up the US 10-year yield to as high as 4%.

The yield initially dropped on Wednesday after the Trump administration released the biggest list yet of Chinese goods it may hit with tariff increases. It later recovered to trade slightly higher at about 2.86%.

Janus Henderson – Bill Gross

Bill Gross’s Janus Henderson Global Unconstrained Bond Fund has been battered this year betting that German bund yields will catch up with Treasuries. Instead they are the farthest apart in almost three decades, with bunds anchored by rising political risks and a downward reassessment of European Central Bank rate hike expectations.

Goldman Sachs Strategic Income Fund

Goldman Sachs $4 billion Strategic Income Fund has underperformed all peers in the past month, despite marketing itself as a portfolio that can “potentially gain in any rate environment.”

Iain Lindsay, the firm’s co-head of fixed-income portfolio management, said competing pressures from robust US growth on one hand and trade tensions on the other underscore the need for a “dynamic approach” to duration management.

Brandywine Global Investment Management – Jack Mclntyre

“Trade tensions have hurt our European growth thesis,” argued McIntyre, who oversees $58 billion of fixed-income assets at Brandywine Global Investment Management. “We need clarity on how trade is going to unfold for our short European duration positions to outperform again.”

Reference:

Bloomberg, Natasha Doff & Cecile Gutscher, 2018-07-11, “Bond Giants’ Bet $100 billion on Growth.  It Hasn’t Paying off”

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