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Negative US gov’t bond sentiment shows little sign of change

Against the backdrop of a US bond market sell-off in January, a look at the performance of European US Government bond funds shows that not a single one has beaten the 10-year Treasury Note return of 7.25% over the three years to 31 December 2017, according to FE Analytics.

Dollar beats sterling as money market funds start 2018 strongly


Jassmyn Goh

The selloff in the sector extended on Monday with US Treasuries hitting their cheapest level in almost four years as the yield on 10-year notes rose to 2.71%.

According to FE Analytics the best fund in the sector over three years to the end of last year was Pictet’s USD Government Bonds I fund, which returned 4.83% over this period.

It was followed by the Vanguard US Government Bond Index Institutional USD Accumulation tracker fund at 4.46%, then Union Bancaire Privee’s UBAM US Dollar Bond Accumulation USD at 3.01%, and the Massachusetts Financial Services’ (MFS’) Meridian US Government Bond A2 USD at 2.11%.

All the funds have seen their performance returns decline since January 2017.

The lacklustre results have been reflected in Expert Investor’s data that has found time and again that the most negative sentiment has been reserved for developed manager government bonds among European fund selectors.

Expert Investor’s research team found that in all countries holders and sellers were competing for attention and the few buyers were overshadowed. In terms of flows, the asset class had suffered losses but also had a few monthly net gains.

The selling intentions of fund selectors has been stable since Q2 with 41% of fund selectors intending to decrease their holdings by the end of 2017.


Dollar weighs

These intentions could be impacted for European based fund selectors by the US currency’s slide against the euro in the early weeks of this year and whether this is likely to become a trend throughout 2018.

These concerns were heightened when, speaking about the US dollar at the World Economic Forum in Davos last week, US Secretary of the Treasury Steven Mnuchin, said: “In the short term, where the dollar is, is not a concern of mine.”

“It will fluctuate. In the short term there will be benefits and issues with a lower dollar. In terms of the benefits, it is beneficial for our trade imbalances, there are also issues for people that hold dollars,” he said.

Mnuchin’s remarks sparked a 2% tumble in the US dollar index. Although, after US President Donald Trump addressed the issue when he spoke at Davos and said Mnuchin’s comments were taken out of context, the greenback did recover slightly.

“Our country is becoming so economically strong again, and strong in other ways by the way, that the dollar is going to get strong and stronger, and ultimately I want to see a strong dollar,” Trump said.

Shifting outlook

Also speaking at Davos, London School of Economics professor Keyu Jin said the big challenge facing the dollar was confidence in its continued status as a reserve currency and the rise in geopolitical risks .

“The US maintains the status of the dollar predominantly because of a lack of present alternatives,” she said.

Supply concern

Meanwhile when looking at yields on US Treasury investments, Heartwood Investment Management investment director David Absolon believes the US Treasury market’s vulnerability to supply and demand pressures is now increasing.

“US Treasury selling in early January was, in part, prompted by media reports that the Chinese authorities may reduce their buying of US treasuries. While these reports have since been denied, the US Treasury market’s reaction is nonetheless indicative of its sensitivity to supply factors,” he said.

“And it is all the more noticeable in an environment where we are seeing a regime shift among global central banks from quantitative easing to quantitative tapering. Reduced global market liquidity is likely to receive more market attention as the year progresses.”

According to reports by Bloomberg, JPMorgan Chase & Co. strategists forecast that net new Treasury issuance in 2018 is also expected to rise by about $100bn (€80.35bn), to around $1.42trn after the passage of the tax bill.

Ashmore Group’s head of research, Jan Dehn, said: “Markets are beginning to wake up to the fact that there is likely to be a doubling of supply of US Treasuries in 2018 following the Trump tax cut, which will cost tax payers $1.5trn (8% of GDP) in future debt payments, plus interest,” Dehn said.

“Indeed, this piece of legislation could be the single largest example of fiscal irresponsibility in modern US history.”

Pressure on the dollar and on yields though greater supply seem unlikely to turnaround the intentions of European fund selectors, at least in the near term.

The funds included in this article were found using FE Analytics’ FCA Recognised universe that were US Government bond focused and domiciled in Luxembourg or Ireland.