Old Mutual Asset Managers plans to further reduce its exposure to Treasuries by selling the equivalent of up to £6 million in T-bills as the global economy continues to improve. The firm began selling off Treasuries last month and reduced its allocation from 27% to 21% of its £99 million International Bond and Convertible Fund. Sofia Skalistiri, London-based head of the fixed-interest desk notes, however, that if there is an indication that a U.S. economic recovery is not sustainable it could lead to a rally in Treasuries. Accordingly, Skalistiri says she will continue selling Treasuries but will not reduce her allocation to less than 15%.
Old Mutual has also taken a position in Japanese government bonds for the first time. Skalistiri says one of the attractions of yen-denominated bonds is that they have a low correlation to other markets. Old Mutual may add more currency exposure, as Skalistiri believes there is more room for the yen to appreciate. She will hold off on adding more yen bonds until there is evidence the Japanese economy is recovering, such as strong equity markets and continuing signs of growth.
The firm is overweight Canadian government bonds, which are sporting a better yield compared to U.S. bonds. Old Mutual currently has a 5% allocation to Canadian government bonds, but may increase that slightly.
Skalistiri says the fund is just over half a year shorter than the J.P. Morgan Government Bond Index, with the benchmark at 5.8 years and the fund's average duration at 5.2 years. After Christmas, Skalistiri plans to start raising duration to a neutral or possibly overweight level because she expects economic data will show that inflation remains low despite an improving economy. Low inflation, in turn, should prompt a rally in the bond market, she reasons. She aims to add duration ahead of the rally--first going neutral the benchmark and then gradually deciding how aggressive to get.
