Fund that beat most peers shorts dol­lar, buys Japan link­ers

The Star Malaysia - StarBiz - - Foreign News -

SYD­NEY: A bond fund man­ager who beat global peers over the past year is short­ing the dol­lar on ex­pec­ta­tions eco­nomic growth out­side of the US will strengthen.

The green­back would slip against most ma­jor cur­ren­cies as na­tions from Japan to the UK see bet­ter growth, spurring higher rates in those mar­kets, said Bren­dan Mur­phy, head of global and multi-sec­tor fixed in­come at BNY Mel­lon As­set Man­age­ment North Amer­ica.

Mur­phy, who man­ages the US$1.1bil Drey­fus In­ter­na­tional Bond Fund, is short­ing the dol­lar in favour of long po­si­tions across cur­ren­cies in­clud­ing the Ja­panese yen and Nor­we­gian krone.

“The US dol­lar still looks ex­pen­sive to us – we’re in the early stages of a US dol­lar-de­pre­ci­at­ing trend,” said Mur­phy. The yen is “very cheap” and could strengthen to 100 against the dol­lar by year’s end, he said.

The Drey­fus fund has re­turned 11% over the past year to beat 98% of com­pa­ra­ble peers, based on data com­piled by Bloomberg.

Four rate hikes by the Fed­eral Re­serve since the start of last year have failed to spur the green­back, with the Bloomberg Spot In­dex down 8.5% in 2017.

The in­dex has ex­tended losses this year, bruised by ris­ing trade ten­sions with China and wor­ries about Amer­ica’s bur­geon­ing twin deficits.

The yen traded at 107.17 against the US dol­lar at 10:12am Lon­don time yes­ter­day. Spec­u­la­tion that the Bank of Japan may start to nor­malise poli­cies, and de­mand for haven as­sets, have led to the cur­rency ris­ing more than 5% against the green­back this year.

“The mar­ket has priced in the tight­en­ing cy­cle in the US ver­sus the rest of the world,” said Mur­phy. “From a cur­rency per­spec­tive, you’d ex­pect as other cen­tral banks start to tighten in the next few years, that those cur­ren­cies ap­pre­ci­ate and catch up.”

The mar­ket is tak­ing a sim­i­lar view on the dol­lar. Hedge funds and other large spec­u­la­tors boosted net bear­ish bets on the green­back to the most since Jan­uary 2013, ac­cord­ing to data from the Com­mod­ity Fu­tures Trad­ing Com­mis­sion. Dol­lar

The Fed­eral Re­serve would prob­a­bly take the pol­icy rate to around 3% by the end of 2019, with in­fla­tion edg­ing higher slowly, said Mur­phy.

The fund is also buy­ing Ja­panese in­fla­tion-linked bonds, with Mur­phy ex­pect­ing the na­tion’s in­fla­tion to sur­prise even if it’s a dis­tance away from Bank of Japan’s 2% tar­get.

“It’s re­ally cheap in­sur­ance; we do think Ja­panese in­fla­tion will sur­prise to the up­side to what’s priced in,” he said.

The fol­low­ing are ex­cerpts from a Q&A:

1. Por­tu­gal was the big­gest con­trib­u­tor to per­for­mance last year

It was a cheap, high-yield de­vel­oped mar­ket and an im­prov­ing credit story. Emerg­ing mar­ket guys won’t buy Por­tu­gal be­cause it’s a de­vel­oped mar­ket, and the de­vel­oped mar­ket guys didn’t buy it be­cause Por­tu­gal didn’t meet their in­vest­ment cri­te­ria.

Bonds that used to trade at 7% yields in 2013 now trade sim­i­lar to Italy, de­pend­ing on where you are on the curve. That spread com­pres­sion will con­tinue.

2. Spain is next op­por­tu­nity

We love the long end, the 30-year part of the curve. Spain is dif­fer­ent from Por­tu­gal as it’s go­ing from ‘BBB’ to ‘A.’ Their bonds are also el­i­gi­ble for cen­tral bank buy­ing. So as long as the spread is there, that’s where our fo­cus has been.

3. Euro­pean FX to out­per­form dol­lar

We like emerg­ing-mar­ket cur­ren­cies such as the Ar­gen­tinian peso, Columbia peso. We’re con­struc­tive of the euro ver­sus the dol­lar, but we’re even more con­struc­tive on other Euro­pean cur­ren­cies ver­sus the dol­lar. We like the Scan­di­na­vian cur­ren­cies and the Bri­tish pound.

4. Trade war is un­likely

I don’t want to dis­miss the trade war rhetoric but our view is that it’s more of a ne­go­ti­at­ing tac­tic. Trump is try­ing to ful­fill his cam­paign prom­ises – last year was about tax pol­icy, this year the fo­cus is trade.

An all-out trade war will be very dis­rup­tive for the econ­omy, eq­uity mar­kets, for risk as­sets. That type of volatil­ity is go­ing to be prob­lem­atic for the ad­min­is­tra­tion. — Bloomberg

Under probe: A pedes­trian is re­flected in the win­dow of a branch of ANZ in Syd­ney. Ju­di­cial in­quiry on Aus­tralia’s fi­nan­cial ad­vice in­dus­try is now fo­cus­ing on ANZ, Com­mon­wealth Bank of Aus­tralia, Na­tional Aus­tralia Bank and West­pac Bank­ing Corp. —...

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