The best bond fund betting markets are wrong about rates, yet again

(Bloomberg) — After winning bets against the world’s major bond markets pay off in 2022, a BlueBay Asset Management fund is poised for another debt sell-off this year.

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The London-based company’s Global Sovereign Opportunities Fund is short US, Japanese and Italian rates, according to Chief Investment Officer Mark Dowding. He sees a market pleased with policy makers’ willingness to continue raising borrowing costs, even as a series of key central bank meetings looms this week, including the Federal Reserve and European Central Bank.

“We think markets have been too quick to price a dovish Fed,” Dowding said in an interview. “This week’s central bank meetings on both sides of the Atlantic could hold a hawkish surprise.”

The $416 million macro fund, which Dowding co-supervises with Russel Matthews, returned more than 19% in 2022 and was the best-performing European-domiciled bond fund tracked by Morningstar Direct. Dowding said those gains were fueled by bets on a record U.K. bond rout and the Bank of Japan adjusting its yield curve control policy.

The latest rate bet is a contrarian position but could prove profitable if price pressures remain sticky. Those risks were on display on Monday after Spanish inflation unexpectedly rose in January following a five-month series of slowing data, weighing on European bonds and forcing traders to raise bets on how high the ECB will raise rates. interest. French inflation also rebounded in the data on Tuesday.

Other asset managers, such as BlackRock Inc. and Fidelity Investments, have also warned investors that they are underestimating both price pressures and peak US rates. Wall Street almost unanimously underestimated the inflation trajectory a year ago.

So far in 2023 though, going with the herd has been profitable. The Bloomberg Global Aggregate index, which tracks the performance of investment grade debt, rose more than 3% this month in its best start to a year on record. That narrows part of its 16% decline in 2022, when it was hit by rising inflation and aggressive policy tightening.

Fed officials are expected to raise rates by a quarter of a percentage point on Wednesday, trimming the size of the hike for a second straight meeting amid signs of cooling inflation. A report on Friday showed the Fed’s favorite gauge of price increases fell in December at the slowest annual pace in more than a year.

The BlueBay fund’s other positions include:

  • Being short on the British pound. “We think the UK economy will underperform structurally,” Dowding said.

  • Being more constructive on emerging market rates in Brazil and South Africa, “where we believe there is room for yields to fall, despite political volatility,” he said.

  • Seeing value in “select emerging market names,” Dowding said, citing Romania and Oman as cheap on relative value.

(Updates with French inflation, Fed meeting details.)

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