Some of the world's biggest bond fund managers are weathering the big swings in the government bond market, sticking to bearish bets that lingering inflation will keep key central banks from raising rates.
The collapse of U.S. lending companies. Silicon Valley Bank (SVB) and Credit Suisse's falling shares have prompted market players to turn to safe havens with bets that the central bank will slow the pace of rate hikes to a stress-proof financial system.
German two-year borrowing costs, which are sensitive to rate expectations, have fallen more than 80 basis points over the past five trading sessions in the biggest drop since 1981. US bonds have fallen more than 100 basis points in the biggest five-day drop since 1987. As bond yields fell , the price is increasing.
However, asset managers who run large government bond portfolios still expect bond yields to rise and say they will sell when they rise as they expect the European Central Bank and the US Federal Reserve to remain hawkish.
David Zahn, head of European fixed income at Franklin Templeton which manages 5 billion euros worth of assets, said he now prefers to liquidate holdings or use futures trading betting on rising yields.
Legal and General Investment Management (LGIM), the UK-based $1.6 trillion asset manager, also reduced its exposure to government bonds, taking profits following the rise in prices.
The ECB, which has raised rates from below zero to 2.5% since July, is still leaning toward a 50 basis point hike on Thursday, according to several sources. The ECB's forecast for core inflation is likely to be revised higher, the sources said.
Given Wednesday's gripping sell-off in bank stocks, money market prices suggest market players are leaning toward a 25-basis-point Fed rate hike next week. Goldman Sachs no longer expects the U.S. Fed. will raise rates on March 22.
BlueBay Asset Management senior portfolio manager Kasper Hense said the firm had used the rally in bonds as an opportunity to take short positions, essentially betting that bond prices would weaken and yields rise.
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International said the firm was neutral on high-quality bonds but negative on credit markets as a sign of caution.
