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Bond bubble will be deflated gently, says Webb

23 August 2013

Volatility spikes over the summer are not warnings of a sudden crash, the manager says.

By Alex Paget,

Reporter, FE Trustnet

Investors shouldn’t fear a dramatic sell-off in the bond market despite the volatility over the summer, according to Roger Webb, manager of the SWIP Strategic Bond fund, who says that Bernanke is capable of withdrawing the stimulus slowly.

Experts tend to agree that the high prices of developed government bonds have reached bubble proportions, with many concerned that as the Fed reduces – or tapers – its quantitative easing programme it could cause a mass sell-off in the asset class.

Webb (pictured), who manages the SWIP Strategic Bond fund, says that is a real danger; however he says the Ben Bernanke, who is chairman of the US Federal Reserve, knows how much of a delicate situation it is.

ALT_TAG The manager says the Fed will attempt to create an environment where yield rises are staggered, as he says if it happens any other way it would be disastrous.

“It all goes back to the Fed, they don’t want the yield curve to get out of hand,” he said.

“They cannot risk the bubble bursting; I don’t think it is going to happen. Too many parties with too much to lose are exposed to longer-dated bonds so the path to higher yields will most likely be a longer one than the early summer volatility spike suggested.”

“However they need to withdraw the needle gently, which will be extremely difficult to do. But, if there was anyone who can do it it's Bernanke, he is very market savvy and he will attempt to bring the bubble down.”

“The scenario we don’t want to happen is if China slows further and with that global growth slows at the same time that Bernanke withdraws QE. However, these are bigger picture risks which wouldn’t just be a problem for bonds.”

“But for now, the Fed is essentially going to be withdrawing stimulus which will be supportive of the dollar, which at the same time isn’t great for the BRICs. We have already seen some rate rises in India and Brazil,” he added.

Webb makes the point that markets need to accept tapering will happen as QE has to come to an end some time soon, saying “you can’t have the Fed growing its balance sheet by $85bn a month forever”.

Because of that, the manager says that yields will have to rise and the outlook for bonds is by no means positive. However, unlike many other bond managers he isn't giving up duration as he thinks the rises will be slow and gradual.

“The market did get spooked by the policy adjustments," he said. "Comments from the Fed did cause panic but since then, we have seen a significant change in tact. Pre-June comments are now very different to post-June comments."

“Now they are saying that tapering will only happen if issues such as unemployment and growth improve. All in all, the Fed is keen to wrestle back control and most importantly instigate an orderly exit from QE.”

“If they do lose control, they risk a crisis.”

“I think tapering will start over the next few months and the Fed will be able to keep a lid on yields. Because of that, I don’t think it is right to have zero duration at the moment,” he added.

Currently, the average duration on Webb’s fund is 3.7 years.

Webb manages the SWIP Strategic Bond fund with Luke Hickmore, both of whom have been at the helm since it was launched in June 2010.

According to FE Analytics, Webb and Hickmore’s fund has returned 24.4 per cent over that time while the average fund the IMA Sterling Strategic Bond sector has returned 21.89 per cent.

Performance of fund versus sector since June 2010
Source: FE Analytics

SWIP Strategic Bond has also beaten the sector average over one and three years.

The manager’s favour BBB and BB rated credit, which combined make up nearly 60 per cent of the fund’s assets. However they avoid CCC’s because they say investors are not being adequately paid for the risk they are talking – because of that CCC only makes up 3.5 per cent of the portfolio.

The fund currently has a yield of 4.10 per cent, with the majority of that income coming from European High Yield and financials.

SWIP Strategic Bond fund is relatively nimble at £117.9m of assets under management, something Webb says is good for the fund as he says some of his larger peers could struggle if liquidity dries up in the bond market.

“It is a massive advantage,” he said.

“That’s not to say that I am going to slag off our competitors. I mean I think M&G really do a good job, but they have an additional problem as I can’t sit here and say that liquidity isn’t a problem at the moment.”

“Say if anyone wanted to sell on £250m worth of a fund, we managers are really going to struggle to do that over a 24 hour period.”

“That is another reason why Bernanke cannot allow the bond bubble to burst, because not only would it affect housing rates, mortgages and fund managers, but more importantly it would have massive effect on the end product, the consumer,” he added.

SWIP Strategic Bond has an ongoing charges figure (OCF) of 1.38 per cent and requires a minimum investment of £1,000.


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