US managers caught out by bond market rally
By Chris Flood. This article originally appeared on the Financial Times website, FT.com on September 14th, 2014
Almost all actively-managed US long-dated government bond funds underperformed their benchmarks in the first half of the year, according to analysis by S&P Dow Jones Indices.
The data show many fixed income managers were caught short by the US government bond market rally, resulting in widespread underperformance. Nearly 90 per cent of actively-managed long-dated investment grade corporate bond funds also failed to beat their benchmarks.
The figures represent a sharp reversal from last year when just 10.1 per cent of government bond funds and 3.2 per cent of corporate bond funds underperformed their benchmarks over the 12 months to end of December.
Managers were left unprepared by the strong rally for 30-year Treasuries with the yield dropping from 3.94 per cent at the start of January to 3.34 per cent at the end of June.
Aye Soe, director of global research and design for S&P Dow Jones Indices, said the reversal highlighted continuing uncertainty around US monetary policy and difficulties forecasting interest rates.
Ms Soe said the magnitude of underperformance was also notable.
Actively managed US long-dated government bond funds underperformed their benchmark by an average of 358 basis points while long-dated investment grade corporate bond funds underperformed by an average of 227bp.
Marc Ostwald, fixed-income strategist at ADM Investor Services, the brokerage, said there was a lot of “wrong positioning” by bond managers at the start of 2014, which took time to reverse.
Expectations that bond yields would rise as the US economic recovery picked up pace were dented when preliminary estimates for first-quarter GDP showed unexpectedly weak growth.
In the second quarter, rising geopolitical tensions and the S&P 500’s rally to an all-time high meant fixed income assets looked attractively valued relative to US stocks, drawing more buying interest for long-dated Treasuries.
“Not enough investors were smart enough to realise that long-dated Treasuries offering a real yield of 2.6 per cent at the start of the year were a bargain,” said Mr Ostwald.
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