Richard “Dickie” Hodges, Manager of the Nomura Global Dynamic Bond Fund, provides his view of the fixed income market environment over the coming months…
As we approach year end, we have increased hedging of our risk assets and interest rate exposures. Exposures remain to Financials, some of the holdings deeply subordinated and (in our view) protected by the necessity for the ECB to step in once more if there is further instability in the European financial system.
We still hold substantial allocations to both Portuguese bonds and Indian “masala” bonds, and we are concerned over the economic situation in Australia – the housing market is stretched and consumption is subdued.
As we approach year end we have increased hedging of our risk assets and interest rate exposures.
At time of writing, we have put option-based exposures to bunds that could move our European duration exposure strongly negative if they move into the money. This reflects a view that bund yields have failed to reflect economic fundamentals at times, and appear expensive. However, we expect to very actively manage this position and, if it occurs, we are unlikely to leave a significant negative duration position in place for an extended time.
We have established hedges against credit exposures moving wider. Although some of the hedge is achieved via outright index CDS, the majority of the hedge is via put options. If these put options move into the money, investors can expect our net exposure to the High Yield bond sector to be greatly reduced.
This is not to say the Fund has no risk exposure. Exposures remain to Financials, some of the holdings deeply subordinated and protected, we believe, by the necessity for the ECB to step in once more if there is further instability in the European financial system.
We still hold substantial allocations to both Portuguese bonds (which we intend to reassess if the bonds are upgraded by a second major agency to investment grade status) and to Indian “masala” bonds, which we intend to hold over the long term, barring any change of view.
We are concerned over the economic situation in Australia. The housing market is stretched and consumption is subdued. Any sign of weakness in China (Australia’s largest customer for its raw materials exports) could put further pressure on the economy. We have CDS protection on a basket of Australian companies and long-held CDS positions in the major Australian banks.
