William Eigen, who runs the $3.4bn JPM Income Opportunity fund, believes that it is “absolutely stupid” for any bond fund to remain 100
It is based on this belief that he holds large amounts of cash in his fund. Eigen is currently sitting on 44.4
In a recent investor update, he said: “Don’t be fooled by these managers that a fixed income investor should always be fully invested. I’ve been breaking that rule for 11 years in this fund.
Source: FE Analytics
“So far this year, cash has essentially beaten every single asset class in fixed income by a lot, with the exception of senior loans and convertibles. And convertibles are more like liabilities on the edge of equities anyway, so I don’t really count those as pure fixed income.”
This rings true in the UK, as the above chart shows cash funds have outperformed every
The US Federal Reserve hiked interest rates in March and have forecast two more before the end of this year. Eigen embraced this: “We have virtually no exposure to rising interest rates. We actually benefit from rising interest rates to some degree given our short positions and allocations to shorting rate.”
One thing that befuddled him is why people are piling money into strategies that can only make money when interest rates decrease.
He said: “It’s been so easy to make money in fixed income in the past 10 years because you’ve had the single biggest buyer in
“Let’s be clear about
He continued: “You’re fighting the Fed by owning duration right now and the returns prove it. You’re getting crushed in pretty much everything that’s investment grade fixed income related
“So, I don’t want to own fixed income until I feel like I’m not fighting the Fed and I’m not going to be done fighting the Fed until I think the Fed is done. I think the Fed is nowhere close to being done.”
Money market yields are currently sitting between 1.5 and 2
Eigen added: “Given how much money has piled into ETFs and traditional fixed income strategies, I think you still have a technical wave that’s going to come at some point where people realise: ‘Wow, I’m losing a lot of money here, what am I doing in this asset class when I can get 2.36 on 3-month LIBOR? When
“And you’re going to see a wave of disintermediation from traditional fixed income where all the money’s gone for the last decade into other areas like money market, CDS, not traditional
According to Bloomberg, 10-year treasury projections have been off target by almost one
Speaking about last week’s increase of the 10-year treasury yield to 3
US 10-year treasury yield over 1yr
Source: Bloomberg
Eigen said: “At that point, once you get to the 4 to 5
“And at that
However, the bond manager admitted this is not something that would happen in the near future.
“You have to be steadfast about this stuff and you have to ignore the noise and ignore the pundits, which I’ve done for over a decade.”
The flattening of the yield curve does not alter Eigen’s opinion that fixed income markets have been “distorted” by a decade of ultra-loose monetary policy from the world’s central banks.
“The yield curve became so distorted by years and years of Federal Reserve and central bank action that I just don’t think curve shape means the same thing today as it used to 10 to 15 years ago,” he explained.
Last week, the European Central Bank (ECB) maintained its
JPM’s Eigen said: “My opinion is that the ECB is running scared right now. They’re so terrified to reverse policy because of the impact they know it will have that they’re just stonewalling right now.
“That balance sheet is outrageous. If I was a European taxpayer, I’d be freaking out about that. And that balance sheet is loaded with junk bonds at negative yields that were purchased. It’s loaded with
“They’re going to have to hit the market with all that cruddy supply they bought of
He added: “I’m just waiting because it wouldn’t surprise me at all to see my fund loaded up with European high yield at some point in the next few years because of their desire to get rid of it off their balance sheet and they will be willing to take fire sale prices for it.
“That’s not the consensus opinion but then again, I hardly ever have consensus opinion in this fund.”
He insisted that the only way to get out of this would be for the economies in Europe to plummet and said: “If that’s what you’re praying for to get you out of that, then I hope you don’t own any equities. I hope you don’t own anything to do with anything outside of cash and whatever remaining fixed income you have.”
The fund manager added: “I will stick with cash until such time as the opportunity changes in such a way or I can see forward returns exceeding cash in other areas of the market.”
Performance of JPM Income Opportunity vs sector over 1yr
Source: FE Analytics
It is clear that
Although he does own around 20
“We have to be patient and wait for our opportunities. I will not own asset classes like this in size when I’m not getting paid to do so.”