The team behind the JPM Global Bond Opportunities fund are anticipating eight hikes in the Federal Funds rate over the next two years, regardless of who the next Federal Reserve chair is.
Iain Stealey, co-manager on the fund alongside Bob Michele and Nick Gartside, believes the Fed is in line to make three further rate hikes in 2017 and up to four in 2018.
The team believes the central bank is behind the curve on growth and inflation and will have to tighten policy faster than expected.
Stealey said: “When we look around the world at the moment, things are buoyant everywhere.
“[But] US data may be a little bit lacklustre in the first quarter, in the second quarter it is likely to pick up.”
US growth has slowed as US president Donald Trump has experienced opposition to some campaign proposals.
He said: “We think the Fed will be raising rates in line with what they say to the market, maybe a little bit more if some of Trump’s policies come through.”
Stealey says markets may have been disappointed with what the president has achieved during the first quarter of the year and his first 100 days in office. However, Stealey says Trump is likely to get something through on tax reform, which will spur growth and increase the likelihood of further hikes. The team view on rate rises means that it dislikes duration and is short US Treasuries, using interest rate futures. As shown below, longer term Federal Open Market Committee members expect the target rate to reach around 3 per cent.
Source: Federal Reserve
The manager says the prospect of a new Fed chairman is unlikely to affect its view on the likelihood of the Fed increasing rates, given that no new chair is expected until next year.
Any tax reform pushed through by the new president would likely benefit the US high yield space, according to JP Morgan, when combined with low default rates and cost-cutting measures.
Stealey says yields were attractive at the beginning of the year and had moved quite far from lows seen in 2014. However, returns are unlikely to hit levels previously seen in the market although there could be some scope for spread tightening, the manager says.
US high-yield corporate debt represents a 26.2 per cent weighting in the portfolio and the team believes investors might still be able to get returns of 5-6 per cent for the year.
Elsewhere, the managers are more bullish about emerging market debt on a country-by-country basis.
Stealey said: “We’re more constructive on emerging markets. In 2014 and 2015 we were more negative on emerging markets.”
The market looks attractive following more recent strong PMI data and improving current account deficits, according to the team, noting that yields above 6.5 per cent can be found.
Undervalued currencies have presented further opportunities, allowing the fund to invest in EM local currency bonds and keep the FX unhedged to realise the full yield potential.
The manager says negative sentiment towards emerging markets centred on some of Trump’s potential protectionist measures has “somewhat faded”.
Stealey says it has been investing in high-yielding countries such as Russia, Indonesia and Brazil that are benefiting from improved growth and reforms.
More broadly the managers have been reducing duration in the fund, with average duration in the fund currently at 3.5 years, according to the latest factsheet.
He added: “We’ve lowered duration and we’re focusing on the front end of the market and what’s going on with the Fed and US and [to a lesser extent] what’s happening globally.”
Over three years the fund has returned 7.6 per cent compared with a gain of 7.51 per cent from the average IA Sterling Strategic Bond fund and a 4.56 per cent gain from its Bloomberg Barclays Multiverse Hedge GBP benchmark.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
The £17.9m fund carries an ongoing charges figure (OCF) of 0.68 per cent.