The fixed income market has been rocked in recent weeks by Fed chairman Ben Bernanke’s comments on QE, which is expected to grind to a complete halt in the US next year. Yields across the bond universe have spiked significantly, with US 10-year Treasuries a full percentage point higher now than a month ago, at 2.5 per cent.
However Bezalel, manager of the five crown-rated Jupiter Strategic Bond fund, says he expects bond yields to normalise in the short-term, as authorities cannot afford to allow them to rise dramatically. For this reason, he sees no need to panic.
"The way we see it is that the market is panicking over rate risk," he said. "This has come about because the Fed has said they will pair back their quantitative easing, by which I mean buying mortgage-backed securities and governments bonds."
"I think that reaction was a little over the top. The yields on US Treasuries have backed up too high and too quickly."
"The concern here is that if yields go up too high, then it will scupper the economy, as mortgage rates are directly linked to yields on 30-year US Treasuries. We could well see a rally in US government bonds over the short-term. But are we really going to see interest rates go up in the short-term?"
"In the US, I think that chance is fairly low. What I would say is that there is an increasing chance that QE will be 'tapered' and government bond yields will have to adjust to that."
"But there is little chance that will happen in Europe as deflation is still the primary concern," he added.
Jupiter Strategic Bond has an average duration of 2.75 years, meaning it is already less sensitive to interest rate changes than many of its rivals.
Bezalel says that if the panic had ensued because of default risks, then he would be much more concerned; however, as the markets are over-obsessing about interest rates, he feels little need to re-work his portfolio.
"Given the fact the sell-off was sparked over concerns of rate risk and not default risk, I haven’t really done anything," he explained.
"If anything, we have added bits and pieces and have upped our exposure to Europe. The last thing Europe needs is higher yields and as growth is slowing, the ECB may have to step in with liquidity of their own to soften the blow."
Bezalel has managed the £1.5bn Jupiter Strategic Bond fund since its launch in June 2008, meaning he has recently achieved a five-year track record.
It is the second-best performing portfolio in the IMA Sterling Strategic Bond sector over five years, with returns of 69.36 per cent, and has more than doubled the returns of its benchmark – the Iboxx Sterling Non-Gilt All Maturities index – in the process.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund – which is yielding 5.5 per cent – has been a top-quartile performer in its sector over three years as well.
Jupiter Strategic Bond has become popular among investors, more than doubling in size over 18 months.
Bezalel runs a diversified portfolio of bonds. His largest credit weighting is to BBB, BB and B rated debt. His largest regional allocation is in the UK, making up 36.41 per cent of the fund; he also holds 28.23 per cent in Europe.
Bezalel has just 9.8 per cent of his portfolio in North America.
Some of his largest individual holdings are in Australian sovereign debt, which he says has been unfairly affected by the recent sell-off.
"It’s been a frustrating time recently as we have a large position in Australian government bonds," he explained. "Those yields have also been dragged up recently, which I think is wrong as the Australian economy is linked to China."
"As the Chinese economy is slowing down, their need for commodities will also fall and as the Australian economy is primarily driven by commodities, then they will be forced to cut rates rather than increase them."
"It is a bit of a perfect storm in some respects as the 'Shibor' rate has also rocketed. This has meant the Chinese authorities have had to intervene and add liquidity. This will be short-term pain for long-term gain, which I agree with."
Although this overweight position has hurt the fund, it has still protected better against the downside than its Strategic Bond peers in recent months.
Performance of fund vs sector over 3-months
Source: FE Analytics
Bezalel says investors are over-reacting about the bond market as a whole, but feels the outflows from emerging market debt are justified.
"In emerging markets, the sell-off has taken a bit of froth out of the markets, which kind of makes sense," he continued.
"Those prices had raced up too much and, given the fact that the outlook for those economies doesn’t look great, people will have to rethink how fast these countries are going to grow and how fast companies will be able to grow their earnings," Bezalel added.
Jupiter Strategic Bond has an ongoing charges figure (OCF) of 1.5 per cent and requires a minimum investment of £500.
