The short position was first established in Stopford’s £311m Investec Strategic Bond Fund in March, a time when Pimco’s Bill Gross also took a short position in government-related debt in his $243bn Pimco Total Return Bond Fund – interpreted by many to be a bet against Treasuries.
Gross has since said that he was never short Treasuries but has repeatedly expressed his dissatisfaction with US policy actions and has warned that the market for such bonds is “on a collision course with financial repression”.
Nonetheless, yields on ten-year treasuries fell back below the psychologically important 3% mark last week as investors once again grew wary of the prospects for economic recovery in the US and on a global basis.
Stopford cites a number of reasons for maintaining the position. Principle among them is a belief that data disappointments are temporary. “Yields are now approaching levels where further economic weakness is needed for the rally to continue”, Stopford says.
Another factor is inflation, which is, in the manager’s words, “becoming more of an issue” in the US. “Core inflation has more than doubled over the past few months”, he says. Stopford also believes wider issues such as the end of QE and political wrangling over the US debt ceiling could also have an impact.
“There are levels at which we will reconsider our view, for instance if data continues to disappoint for the next three months, and this soft patch turns into something more significant. But yields have come down from the high threes to the high twos this year, and we think the risk-reward looks attractive at the moment.”
Gross, meanwhile, is still short US government-related debt in the Total Return fund but has used his latest investment outlook to warn that the move towards fiscal balancing in the US could “stultify economic growth”.
The manager of the world’s largest bond fund says job creation is a matter of urgency but suggests that neither the Democratic nor the Republican party has “an awareness of the why or the wherefores of how to put America back to work again.”
"Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next ten years", Gross said.
