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Liquidity lessons: two top bond managers clash on market outlook

Liquidity lessons: two top bond managers clash on market outlook

ECB president Mario Draghi’s much-publicised comments about continued volatility in the bond market has given rise to caution among fixed income investors.

While some, such as Mark Nash and Michael Hasenstab, have limited risk and raised cash in response, others are optimistically making moves to add positions now.

But, can bond investors' approaches be viewed as binary options? Here Citywire Global canvasses two leading managers to understand how bond investors should approach risk and liquidity in a time of uncertainty.

The case for risk

Jupiter's Ariel Bezalel, who manages the €4.3 billion Jupiter JGF Dynamic Bond fund, currently holds a 15.8% cash position in his blockbuster fund. However, the Citywire AA-rated manager said he will be selectively adding risk to his portfolio as inflationary rates stabilise.

‘Credit markets going forward are likely to be operating in a climate where global growth and inflation are capped because of the significant level of global debt, with ageing demographics acting as a further cap on consumer demand,’ he said.

‘In this context, we don’t think the global economy would be able to handle markedly higher interest rates and expect any tightening of conditions to be gradual; a gradual approach lessens the chance that we will see periods of extreme volatility in the credit markets.’

Bezalel acknowledged that price action trading is likely to become more volatile going forward, but does not believe liquidity in bond markets will become a sustained concern.

'Within the context of a balanced portfolio, and where close to a quarter of the fund is made up of AAA-rated government bonds, we have actually been adding risk in the last week via the high yield bond market. This is with the view that we should see a favourable resolution to the Greek crisis and we may see a period of stability for rates.’

According to its latest factsheet, the fund's largest regional allocation is the UK (30.3%), followed by the Far East excluding Japan (24.6%) and Europe (17.8%).

The case for caution

Conversely, Lombard Odier's Grant Peterkin, who manages the €450 million Lombard Odier Absolute Return Bond fund and has a 5.6% money market allocation, sees more liquidity woes on the horizon for the credit market.

‘Liquidity is problematic as volatility has increased over the last few weeks. Mario Draghi recently said markets have to expect more volatility. The result of this is that investors are taking less risk so liquidity begins to dry up,’ the Geneva-based manager said.

‘Volatility will remain elevated. This has a knock-on effect on sovereign bonds, which, in turn creates more volatility in credit instruments such as corporate bonds. It’s inevitable we will see some form of pass through so we are wary of the corporate bond market at the moment.'

Liquidity is a chief concern for Peterkin's fund, which looks at 'the most liquid assets' for daily liquidity as part of his strategy of being able to change positions easily.

Currently, Peterkin said he is looking to derivatives as a more efficient way to express a strategy or macro view in an environment of ‘questionable’ liquidity.

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