Pound Extending Drop Leads Kames to Treasuries Without Hedge

Kames Capital, a U.K.-based manager of about 29 billion pounds ($43 billion) of fixed-income assets, bought U.S. Treasuries without a currency hedge, betting the pound will decline further against the dollar.

While returns on Treasuries this year have been negative as the U.S. economy shows signs of recovering, the prospect of the pound rallying are “remote,” meaning investors can profit when converting the investment back into the U.K., said Stephen Jones, co-head of fixed income at Kames.

The firm, a unit of Dutch insurer Aegon NV, has been buying U.S. government bonds with “some of them unhedged relative to sterling, and that’s been quite a good source of performance,” Jones said in an interview at Bloomberg’s Edinburgh office on March 11. “We like the exposure they give to the dollar.”

Britain’s currency has slipped 8.1 percent against the dollar this year amid concern that the U.K. economy will slip back into recession. Sterling fell yesterday to the weakest level since June 2010 as a government report showed U.K. industrial production unexpectedly dropped in January.

The pound gained 0.3 percent to $1.4944 at 8:31 a.m. London time, snapping five days of declines. It was 0.2 percent stronger at 87.33 pence against the euro. Britain’s currency has fallen 6.9 percent versus the euro this year.

Kames, whose unhedged position means it bought Treasures without using instruments that guard against swings in exchange rates, also favors U.S. bonds because it expects the Federal Reserve to keep its monetary stimulus, Jones said.

Treasuries have declined 0.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. In pound terms, though, they have risen 8.1 percent, the gauges show.

“The total return from the bond market out of the U.S. is a little negative, but if you had some of it unhedged you can mitigate some of that reasonably,” Jones said. “A stance that favors dollars, certainly against sterling, and other currencies is implemented in our portfolios.”

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