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Bond bubble will burst, warns bond manager

GLG’s Jon Mawby says it is now a matter of when, not if, yields on government bonds will rise.

Alex Paget

By Alex Paget, Reporter, FE Trustnet
Thursday February 21, 2013

The bond bubble is close to bursting, according to fixed income manager Jon Mawby, who says he is looking at methods of protecting his portfolio from rising yields.

ALT_TAG Fixed interest has had a great run over the last three decades – particularly in recent years – and consequently yields across the corporate and government bond markets are at all-time lows.

Mawby, who manages GLG Strategic Bond with FE Alpha Manager Steve Roth, says the bubble in government bonds will eventually burst, although he says it is difficult to say exactly when that will be.

"One of the biggest themes in the portfolio is the question of duration, everybody is talking about a bubble in government bonds," he said.

"I can categorically say that we are coming towards the end of a bond bubble."

"However, how long that will take to play out is difficult to say. For instance, Japan has been at the end of its bond bubble for the last 20 years or so."

"We have seen a huge amount of intervention from the world’s central banks in the form of quantitative easing, so our core view is that [interest] rates will continue to stay lower for longer."

"There is still a lot of deleveraging needed so it is difficult to tell when interest rates will be driven higher again."

"What we are trying to do is mitigate that risk by focusing on certain areas of the market. One of those is FRNs [floating rate notes] which act along similar lines as an index-linked bond."

"We are also shorting gilt futures and shorting OATs futures, which are other tail-risk hedges."

Mawby says no-one can be sure when gilt yields will rise, but there are a number of events that could trigger a change.

"A variety of factors could lead to gilt yields rising; if inflation expectations feed through into wage growth, or if there is an asymmetric shock in commodity prices," he said.

"Also, if we enter a more normal economic cycle and global GDP growth expectations pick up, we could see yield curves begin to normalise in tandem."

"Structurally, we have been in a bull market for the last 30 years and though there have been areas of cyclicality, rates have continued to trend lower."

"It is difficult to say when the structural nature of the bull market will reverse course, but it is safe to say that it will reverse and the consequences when it does so will be wide-ranging."

Mawby says he sees little value in many investment grade corporate bonds, and is looking towards better risk-adjusted opportunities in his GLG Strategic Bond portfolio.

"In certain areas, investment grade corporate bonds are rich – when you look at break-even durations, the valuations are very rich, so we are shying away from these areas because they don’t provide good risk-adjusted investment opportunities."

"There are very good opportunities in the BBB space, but these are very much on a stock-specific level. We are looking at shorter-dated maturities because the margin of error gives you more attractive yields."

FE data shows that his Global Corporate Bond fund has more than 50 per cent of its assets in BBB rated credit.

It is a geographically diverse portfolio, with 25 per cent in the US, 23.9 per cent in Europe and 15.9 per cent in the UK.

GLG Global Corporate Bond has a total expense ratio (TER) of 1.42 per cent and its minimum monthly savings investment is £250. Mawby has only been on the team since September 2012.

According to FE Analytics, during his short career in running portfolios in the IMA universe, Mawby has returned 9.19 per cent. So far he is ahead of his peer group composite, which has returned 4.88 per cent over the same period.

Performance of manager vs peers since Sep 2012


Source: FE Analytics

As well as co-managing GLG Strategic Bond, Mawby runs GLG Global Corporate Bond. He took over the £118m fund in September 2012.

Before joining GLG in 2012 he had spells at European Credit Management, Gartmore, Aviva and Goldmans Sachs.

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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