J.P. Morgan Fleming Asset Management has been building a moderately short duration position in U.S. Treasuries in its $30 billion global fixed-income portfolio and will take profits once 10-year U.S. Treasury yields reach 5.6-5.7%. Last Tuesday, the yield on the 10-year was 5.2%. London-based Jonathan Griggs, head of macro research for global fixed-income, says the portfolio's U.S. Treasury duration is now at about 0.5 years, versus a neutral duration earlier in the year. He expects this trade to run for at least three more months. For those accounts that are run based on ex-U.S. dollar benchmarks, the firm also has been running a short duration strategy at a quarter to a half year. Griggs says the firm has been focusing on buying German and French government bonds to implement the strategy. About 5% of the portfolio has been allocated to European bonds.
Griggs says the firm has put on this trade because it feels that the flow of economic data from the U.S. in January and February was stronger than the consensus. In the firm's opinion, the strong data will force a reappraisal of the Federal Reserve's plans and lead to upward pressure on yields in short and intermediate maturities. "Because the market was discounting a significant rise by mid-year to into 2003, it could become concerned if rate rises came earlier and faster than expected," says Griggs. The reason the firm has not gone to a maximum short position is that the yield curve is very steep. "We've looked at the 1993-94 period and concluded that there are significant differences: then yields and rates were high, now yields are already higher [than that period] and the scale of that rise will be more moderate," says Griggs.
The firm uses a variety of global bond indices from J.P. Morgan and Salomon Smith Barney.
