SG Asset Management UK is looking to increase duration in its government bond portfolios when 10-year gilt yields hit 5.25%. They were at 5.09% on May 11.
"SGAM's econometric models show fair value for 10-year year gilts to be 5.5%, but regulatory influences depress market values by 25 basis points," said Stephen Peirce, director and head of corporate bonds in London. SGAM manages £350 million of fixed income, £280 million of which is benchmarked against government indices such as the FTSE All-Stock Gilt Index.
Specifically, Peirce is short the middle of the curve (10-year maturities) and will buy securities there to increase duration. He pointed out that the long end is supported by pension funds and the short end is supported by central banks and prospective reinvestment of maturing bonds. Both the 6.75% '04s and the 5% '04s will be maturing this year, and Peirce expects the proceeds to be reinvested down the shorter end of the curve
The £36 million SG Sterling Bond Fund, which functions as a reference portfolio for SGAM's other fixed income holdings, has a duration of 25 basis points shorter than the 7.1 years of the benchmark. The fund used to be half a year short, but Peirce recently closed out some positions following weakness after the last U.S. payrolls report. Peirce said he is surprised that U.K. interest rate expectations have risen so far so fast, given a CPI of only 1.1%. Nonetheless, he expects CPI to rise to 1.3% next month, and wouldn't be surprised to see rates rise by another half a point to 4.75% by year-end.
