Manabu Tamaru is shorting UK bond futures on expectations the nation will continue paying a hefty inflationary price for its divorce from the European Union.
(Bloomberg) — Manabu Tamaru is shorting UK bond futures on expectations the nation will continue paying a hefty inflationary price for its divorce from the European Union.
The Tokyo-based money manager at Barings, which oversees $362 billion globally, sees little reprieve for the UK’s struggle with inflation — from soaring food prices to a shortage of workers — which he sees as worsened by Brexit. UK five-year yields climbed 280 basis points last year, the most since 1994, with investors demanding increasingly lofty yields to compensate for sky-high price increases. They’re up more than 100 basis points this year as well.
Tamaru, a 34-year markets veteran, is taking measures to protect his portfolio against a further rise in yields.
We own UK government-guaranteed bonds “but all the interest-rate risks are hedged by selling UK gilt futures,” he said. “We are not constructive on UK gilts.”
The guaranteed securities offer a spread over gilts and are hard to come by in the market, Tamaru said, explaining why he continues to hold the debt rather than selling it.
Gilts were the worst performers among major government bond markets in the first half as the Bank of England raised its key rate by 1.5% points to 5%. Traders bet it will move ever higher to quell the hottest prices in three decades.
The BOE is expected to raise rates by 40 basis points in the third quarter, economist forecasts show. Markets are pricing in about five quarter-point hikes by year-end, according to data compiled by Bloomberg.
“UK inflation is stickier than other G-7 nations,” Tamaru said. “They are also affected by the lack of labor supply.”
–With assistance from Yumi Teso.
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