Investec Asset Management said it’s selling government bonds and betting U.S. interest rates will rise as concern economic growth is faltering is “overdone.”
The company, which has $65 billion under management, is selling European and U.S. government debt and will accelerate offloading the securities should further data point to stabilisation in the economy, said John Stopford, the company’s head of fixed income in London. Investec also bought put options on eurodollar interest-rate futures.
“The market is getting a bit hysterical,” Stopford said. “Clearly, growth is in the process of slowing somewhat, but the bond market is pricing in a 50 or 60 percent chance of a double dip and deflation. That’s too high in our view. The risk/reward favors being short bonds.”
Two-year Treasury yields fell to the all-time low of 0.4542 percent on Aug. 24 and 10-year German bund yields declined to a record low of 2.087 percent on Aug. 31 amid concern the global economy is struggling to recover from the worst recession since World War II.
A report last week showed private payrolls in the U.S. climbed 67,000 after a revised 107,000 increase in July that was more than initially estimated. The gain exceeded the 40,000 median increase in a Bloomberg survey of economists. Paul McCulley, managing director at Pacific Investment Management Co., said the jobs data lowered the odds that the Federal Reserve will seek more quantitative easing at this month’s policy meeting.
German government bonds posted their first weekly decline since July last week after the euro region’s service and manufacturing data beat economist predictions. The European Central Bank on Sept. 2 raised its economic forecasts for the region, and President Jean-Claude Trichet said a double-dip scenario is “not in the cards.”
“Valuations are moving towards the bottom end of what is likely, and we are beginning to see tentative signs of market exhaustion,” said Stopford. “Key fundamental drivers are stabilising. People are underestimating the risk of inflation.”
Put options on interest-rate futures allow the owner the right to sell the futures, potentially making money should interest rates increase.
U.S. interest-rate futures have risen, pushing the implied rate for the December contract down 37 basis points since the end of June to 39 basis points, suggesting investors raised bets that the Fed will further ease its monetary policy.
Treasuries gave investors a 7.7 percent gain so far this year, while German bunds rose 8.8 percent, according to indexes compiled by Bank of America Merrill Lynch.