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Top Bond Fund Bets Markets Are Wrong on Rates, Again

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(Bloomberg) — After successful bets against the world’s major bond markets paid off in 2022, a BlueBay Asset Management fund is positioned for another debt selloff this year.

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The London-based firm’s Global Sovereign Opportunities Fund is short US, Japanese and Italian rates, according to Chief Investment Officer Mark Dowding. He sees a market that is complacent about policy makers’ willingness to keep hiking borrowing costs, just as a string of major central bank meetings loom this week including from 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 may contain a hawkish surprise.”

The $416 million macro fund, which Dowding oversees alongside Russel Matthews, returned over 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 UK bond rout and the Bank of Japan adjusting its yield-curve control policy.

The latest punt on rates is a contrarian stance, yet it could prove profitable if prices pressures remain sticky. Those risks were shown Monday after Spanish inflation unexpectedly quickened in January after a five-month run of slowing figures, weighing on Europe’s bonds and forcing traders to boost bets on how high the ECB will raise interest rates. French inflation also rebounded in data Tuesday.

Other asset managers — such as BlackRock Inc. and Fidelity Investments — have also warned investors are underestimating both price pressures and the ultimate peak of US rates. Wall Street almost unanimously underestimated inflation’s 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, has risen over 3% this month in its best start to a year on record. That trims some of its 16% plunge in 2022 when it was battered by soaring inflation and aggressive policy tightening.

Fed officials are expected to raise rates by a quarter-percentage point on Wednesday, dialing back the size of the increase for a second straight meeting amid signs of cooling inflation. A report Friday showed the Fed’s preferred gauge of price increases eased in December to the slowest annual pace in over a year.

The BlueBay fund’s other positions include:

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

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

  • Seeing value in “select EM names,” Dowding said, citing Romania and Oman as cheap on a relative-value basis.

(Updates with French inflation, detail on Fed meeting.)

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