FUNDVIEW-Russell Investments cautious on U.S. T-bills

* Potential for further rally in T-bills is slim

* MBS offering better spreads than investment grade

By Claire Milhench

LONDON, Nov 5 (BestGrowthStock) – U.S.-based asset manager Russell
Investments said it was taking a cautious stance on U.S. and
Japanese government bonds as yields are very low, preferring
higher yielding credit and emerging market debt.

Gerard Fitzpatrick, who manages some $5 billion in Russell’s
global bond portfolios, said that U.S. T-bills had rallied
significantly ahead of the Federal Reserve’s announcement that
it would do another $600 billion of quantitative easing, and the
potential for any further rallying is slim.

“U.S. duration in the portfolio was higher around the middle
of year but we have reduced that, and we are now underweight
versus the benchmark,” he said.

Generally, the higher the duration in a bond portfolio, the
greater the risk, as the price will drop more as interest rates
start to rise.

Fitzpatrick, who is based in London, also trimmed the
duration in Japanese government bonds. These traded down to a
yield of 83 basis points for the 10-year after the Bank of Japan
announced its own asset purchase programme.

“You always have to be ready for a sudden increase in bond
yields,” said Fitzpatrick. “The sector is quite expensive
compared to historical levels, and you have to be aware of the
risk of a big bond sell-off at short notice.”

He said that such a sell-off could be triggered by a strong,
unexpected reduction in U.S. unemployment numbers, signaling to
the Fed that their QE job is done, and ultimately removing the
Fed bid from bonds.

Russell’s Global Bond Fund was up 10.6 percent in the 12
months to end-September, whilst its benchmark, the Barclays
[BARCBB.UL] Capital Global Aggregate Index, was up 6.1 percent.

Fitzpatrick was also underweighting the euro due to
continuing sovereign debt concerns in Greece, Ireland, Spain and
Portugal. “There is a huge amount of indebtedness here so it
would be surprising if they all came through this unscathed.”

European authorities have signaled that any further pain
incurred by a sovereign debt crisis will have to be shared with
bondholders rather than simply borne by taxpayers, raising the
possibility of a default or a debt restructuring.


In credit Fitzpatrick was overweighting high yield bonds,
emerging market debt, and U.S. non-agency mortgage-backed
securities (MBS), which are those issued by banks.

“The default rate for high yield has fallen to low single
digits as the improvement in company balance sheets and low
interest rates have helped companies repay debt,” he said.

He said emerging market debt offered good diversification
benefits, particularly local currency debt, whilst non-agency
MBS were attractive because they offered wider spreads than
investment grade corporate debt.

“Even net of defaults the return is higher (for MBS),” he

Although U.S. house prices are expected to fall a further 10
percent and delinquencies have been relatively high compared
with the historical average, Fitzpatrick said that in some
tranches of MBS there was still enough cash coming through to
pay the investor.

“You do need to go through them quite carefully to pick the
winners from the losers, but it has performed well over the last
18 months,” he said.
(Editing by Chris Vellacott, Sharon Lindores)

FUNDVIEW-Russell Investments cautious on U.S. T-bills