The risk of a “policy error” in the US has increased, according to Jupiter’s Ariel Bezalel.
The US Federal Reserve has strongly indicated it will raise the interest rate this year from its historically low level.
This has prompted sell-offs in US government debt and has contributed to aggressive routs in other global bond markets during the first half of this year.
“The hardening of Federal Reserve rhetoric around the provision of guidance has added to general nervousness about the outlook for US monetary policy, and this has proved a headache for bond markets,” Mr Bezalel (pictured), manager of the £2.7bn Jupiter Strategic Bond fund, said.
“In our view, the risk of a policy error has increased as a result.”
But Mr Bezalel thought an interest rate hike as early as September would not be a “sell signal” for fixed income, as a still-fragile economy and low inflation meant there was unlikely to be a sudden rise in economic growth.
“In this context, we don’t think the global economy would be able to handle markedly higher rates and we expect any tightening of global monetary conditions to be gradual,” he said.
Elsewhere, fears that Greece will leave the euro “will continue to dominate headlines and induce bouts of volatility in credit and peripheral sovereign debt”.
The manager is therefore avoiding short-dated, lower-quality fixed income in the surrounding eurozone countries in case policymakers decide to intervene.
“A sell-off in peripheral government bonds [such as in Spain, Italy and Portugal] could lead to more aggressive intervention by the European Central Bank to keep a ceiling on yields,” he said.
“Given this, we believe that having a large weighting in medium- and long-dated, triple A-rated government bonds, with the aim of mitigating deflationary tail risks, is a sensible route for us to take.”
Australian bonds are a “core allocation” within the portfolio. Mr Bezalel has a “bearish outlook” on the country’s domestic economy and thought the slowdown in China would continue to dampen its economy.
In spite of this, he thought “the debt metrics for the Australian government compare most favourably with other leading developed nations”.
Elsewhere, the manager added to Cypriot government bonds earlier this year, encouraged by the country’s reform process since its bailout in 2012.
