The news sent yields on UK and US government debt soaring above 2.5 per cent, a level they had not seen in more than two years.
Currently, US 10-year bond yields are at 2.58 per cent, while UK gilts are at 2.37 per cent.
Many bond funds have been caught out by this rise and have suffered mass outflows as a result.
The Ignis Absolute Return Government Bond fund, however, seems to have found the sweet spot when it comes to making money in these unpredictable conditions.
Ignis Absolute Return Government Bond has recently eclipsed £1bn in assets under management, and according to Ignis’ Helen Farrow, the fund posted its best performance so far in the second quarter of this year, just as volatility ramped up significantly in the asset class.
The fund aims to deliver positive returns by taking both long and short positions in safe-haven government bond markets and currencies, and was recently tipped by FE Alpha Manager David Coombs.
"It’s a bond fund that looks at: the view of what’s going to happen to the economy; short-dated bond rates and medium-dated rates, which are affected by the global economy and supply and demand; and long-term, which is impacted by regulation and supply and demand," Farrow said.
It is a strategy that has worked well of late.
While the fund has underperformed the IMA Targeted Absolute Return sector over the last year, it has significantly beaten cash, measured by the Bank of England base rate, over that period.
Over the last six months the fund has surged ahead, picking up 3.44 per cent while the sector is up 2.75 per cent. Cash picked up a meagre 0.25 per cent over the period.
Performance of fund vs sector and index over 6 months
Source: FE Analytics
Its outperformance has been even stronger over the shorter term. The fund has more than doubled the returns of the sector over three months and over the last few weeks has returned nearly six times as much.
Since launch in March 2011, it is up an impressive 14.92 per cent, compared with 5.18 per cent from the sector and 1.14 per cent from cash.
Performance of fund vs sector and index since launch
Source: FE Analytics
Over the last year, the fund has had an annualised volatility score of 3.11 per cent compared with 2.06 per cent from the sector.
Farrow (pictured) says the fund’s outperformance has come from being one step ahead of the rest of the market when it comes to anticipating central bank policy, particularly in the US. "We felt there was so much liquidity being pumped into markets that they were eventually going to get the economy going. It was enough to kick-start things and see prolonged improvement," she said.
However, she added that with a healing economy naturally comes the end of monetary easing, something the team at Ignis has been preparing for for the last year.
Even now, she believes tapering will begin as early as the next quarter.
"This is increasingly becoming a consensus view," she said.
Farrow says the results of the September meeting of the US Federal Reserve will be extremely important for the future of the bond market, and she expects the central bank to start tapering from then on.
However, the manager says the fund has a lot of tools to manage volatility and increase returns in response to such a move.
Farrow and her team have taken a short position on US inflation and reduced a short position in five-year bonds in the US and Europe.
She adds they have a positive view on the US dollar versus the Japanese yen – predicting the dollar will continue to rise against the Asian currency.
"We were very early but we’ve timed that quite well," she said. "We’ve taken profits and gone back in at lower levels."
She is particularly bearish on the Australian dollar, which has been pressured by depressed commodity prices and a rising deficit.
Farrow says the team has trimmed this position, but expects to go back into it because the outlook is so grim for the currency.
The fund does have some long positions, such as long-dated forward rates, which represent a contrarian view in an increasingly unpredictable fixed income market.
"It’s interesting you could make money being long last quarter, but that’s what we did," she said.
"We think volatility has gone very high in the last quarter."
Ignis Absolute Return Government Bond requires a minimum investment of £1,000 and has ongoing charges of 1.34 per cent.
