Citywire AA-rated Bob Jolly has moved long UK and short US bonds when the Bank of England governor dropped hints of a possible rates rise.
Jolly, who runs eight bond funds at Schroders, made the changes in his Strategic Bond fund around the time of Mark Carney’s Mansion House speech in June.
Speaking to Citywire Global, Jolly said he bought two-year rates at the front end of the UK curve as Carney’s comments suggested rates could rise sooner than expected.
‘We think that structurally the UK has still a lot to do in terms of getting through the challenges that remain after the financial crisis. The households’ finances and income growth are still tepid compared to the US,’ he said.
Prior to the Mansion House speech, Jolly had short positions on both the UK and US bonds as he thought the countries were in a similar economic situation and would have beat expectations in terms of economic growth.
Elsewhere in the fund, he has gone short five year and long thirty year US treasuries over the past five months as he believes the Federal Reserve will surprise rising rates sooner than expected.
Waiting for more QE
The ECB is essentially trying to turn the European sovereign bond market into a pretty similar market, according to the Schroders’ manager.
‘The new measures taken by Draghi will benefit the periphery. That’s why we’re long Spain and Italy and like the carry aspect of buying Spain against Germany.’
‘Europe needs to adopt structural reforms to boost its level of competitiveness. The ECB can do its part of the job, trying to weaken the euro and work on exchange rates.’
The fixed income star expects more QE to come early next year and thinks there is still a long way to go before inflation and investment spending will rise across the region.
‘We were quite happy for the measures taken by Draghi. We're already short duration in the States and long duration in Europe, and countries' spreads moved in our favour. Our short euro position worked very well,’ he added.
Positive on banks
‘Banks were boring 20 years ago. Now, after years of exuberance, they are becoming boring again. This is why we like them.’
Jolly’s strategic bond fund, according to the latest factsheet, is 29% exposed to financial institutions as the manager thinks the whole sector is in a solid position and offers attractive spreads.
Still in the credit space, Jolly owns tech giants Microsoft and Apple bonds among his top holdings in order to ride the demand for long-dated and safe corporates offering a relatively attractive spread.
Over the past three years, the Schroder ISF Strategic Bond fund returned 10.24%, almost 11 percentage points more than the Citi WGBI TR index.