Aberdeen Bets Rise in U.S. Bond Yields Not Over on Fed, Profits

  • Money manager is holding put options on 10-year Treasuries
  • Firm sees rate gap between New Zealand & Australia widening

Why the U.S. Dollar Might Be About to Rally

Aberdeen Standard Investments is wagering that the rebound in Treasury yields will take another leg higher as an expanding recovery pushes the Federal Reserve to tighten policy further and corporate earnings boom.

The money manager has been holding exchange-traded out-of-the-money put options on 10-year Treasury notes for about two months, said Nick Bishop, director and head of Australian fixed income at Aberdeen. He favors his “conditional” bearish bet rather than an outright short position due to concern that tension may flare up between the U.S. and North Korea.

“Yields are low for an economy that’s growing reasonably well and a central bank that’s still hiking,” Bishop said in an interview in Singapore on Thursday. “Corporate America is growing very healthily, so it should be reflected in slightly bigger term premiums and slightly higher yields.”

Bishop isn’t alone expecting the increase to continue, with forecasters in the most recent Bloomberg poll now seeing 10-year yields climbing to 2.48 percent by the end of this year. The yield fell to a 10-month low of 2.01 percent last week as tension over North Korea escalated and as investors assessed the Fed’s plans to raise borrowing costs and announce the beginning of its balance sheet reduction as early as next week.

Also adding to his cautious position on bonds is the strength of U.S. companies. Firms on the S&P 500 Index, which closed at an all-time high on Wednesday, will post a 17 percent increase in earnings per share in the coming 12 months, according to analyst forecasts compiled by Bloomberg.

Here are some of Bishop’s other key investment views:

  • Holds a paying position for New Zealand against a receiving position for Australia, both via forward-starting three-year interest-rate swaps and expects that spread to widen by 30 basis points; says New Zealand economy more advanced than Australia’s
  • Doesn’t see material impact from upcoming New Zealand election on its economy, which is driven more by Asian demand for soft commodities and domestic consumption in the nation, particularly the property market, he says
  • Bishop has reduced holdings of fixed-income securities issued by major Australian banks and holds credit-default swaps for these borrowers; says asset growth is challenged due to macro-prudential lending controls and a likely slowdown in the housing market
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