London-based Investec Asset Management's next move is to add to emerging market government bonds and to lengthen duration in its strategic bond funds, according to Jeremy Toner, co-manager. Investec has $500 million invested in strategic bond funds and runs them against a composite benchmark weighted 33% to the Citigroup World Government Bond Index, 33% to the Merrill Lynch Global High Yield Index and 33% to the J.P. Morgan Emerging Market Bond Index. The firm manages $25 billion in fixed income overall.
Toner plans to increase the fund's weighting in emerging market government bonds from about 12% to about 22% once the spread over Treasuries backs up to 500 basis points. "The spread has been at 300bps but it's crept back up to about 400bps recently; the long-term average is closer to 700bps, though that includes crisis periods," observed Toner. He is waiting for the Federal Reserve to remove its accommodative monetary stance, which will force credit spreads to widen out to "more normal levels." At that point, he says there will be more two-way risk in the market and more value in certain emerging market countries. He declined to specify which regions he would start buying, though said at the moment the fund is positioned in relatively safe governments like Qatar while avoiding the likes of Ecuador and Columbia.
In addition, Toner will start lengthening duration in the funds once the yield on the 10-year Treasury reaches 5%, up from 4.6% currently. The manager did not say by how much he would raise duration, which is currently two years below the benchmark's 5.5 years. He said he would take money out of cash, two-year and 10-year bonds, as well as floating-rate notes to fund the move.
