What is happening in the US with regard to debt?
"The ratings agencies have sent a warning shot to the US about concerns over its long-term fiscal position, and encouraged it to come up with a deal that will pave the way for the debt ceiling to be raised, thus avoiding a technical default."
"As expected, a deal to increase the debt ceiling was struck this week. Obama has backed the deal to increase US borrowing authority and plans to cut deficits by $3.7trn over 10 years. Details were scarce but the plan includes an immediate $500bn cut in deficits. Spending cuts can be expected in the defence sector as well."
What does this mean for bondholders?
"This political consensus and swift reaction has helped reduce the probability of a default, which would have led to an increase in treasury yields. With other macroeconomic factors also influencing rates, such as the end of quantitative easing and the European debt crisis, it is hard to accurately quantify the key driver and wider economic impact."
What would happen if the US lost its AAA status?
"It is not clear yet if there would be a broad sell-off of US treasuries. However, demand should remain supportive due to a number of factors."
"Banks and insurance companies will continue to hold their treasury securities as zero-risk weighted assets on their balance sheets, and foreign central banks will be unlikely to withdraw their holdings given the lack of alternative investments they are facing."
"Further volatility of risky asset valuations may be expected but the US debt ceiling debate is not a new issue and markets have factored this in for a few quarters already."
How are you positioning your fund in this environment?
"With regard to credit, I am underweight the defence sector and sectors linked to possible government spending cuts and overweight technology and pharmaceutical sectors."
"I also have exposure to supranational bonds; for example, World Bank. Back in 2001, when Japan was downgraded from its AAA status, investors favoured supranational entities backed with an average AAA rating, and these bonds saw their yield spreads tighten relative to Japanese gilts."
"My exposure to US treasuries is 33.6 per cent. The fund is slightly overweight long duration compared with its benchmark – we believe uncertainty in the macro outlook for the rest of the year may lead to a further flight to quality and a fall in treasury yields."
"Meanwhile, our US corporate exposure is of high quality and very diversified."
According to FE Analytics data, the FSA offshore recognised Fidelity US Dollar Bond fund has returned 50.12 per cent over a five-year period, outperforming its FO fixed interest US Dollar sector by 0.56 per cent.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
Patel has headed up the fund since March 2009.