Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, stated on Tuesday that the global bond market rout, driven by central bank rate hikes, is likely past its worst phase. He expressed a favorable view on short-dated bonds for the first time this year, noting that BlueBay, which manages almost $600 billion in assets, is now more inclined to hold two-year bonds in Europe and five-year U.S. Treasuries.
Dowding attributed this shift in outlook to the Federal Reserve's recent rate increase, which he believes has bolstered the central bank's credibility in controlling inflation. This has led to BlueBay adopting a more constructive view on holding duration. He emphasized that the U.S. yield curve's recent movements represent an "overshoot of fair value" from a medium-term perspective.
Despite this more positive stance on short-duration bonds, Dowding remains cautious about long-dated government bonds due to concerns about the fiscal outlook in major economies and high debt issuance. He specifically mentioned concerns about U.K. government borrowing, making him wary of long-dated gilts, though short-dated U.K. bonds now appear to offer better value. He also believes the Bank of England is likely to deliver fewer rate cuts than currently priced by the market.
Other investment firms, such as Allspring Global Investments and CG Asset Management, share a similar view, positioning for a widening gap between short- and long-term yields. They argue that market expectations for interest rate increases, particularly from the European Central Bank and the Bank of England, are too hawkish given the economic outlook. Swaps are currently pricing four additional quarter-point rate hikes from the ECB by the end of next year and four hikes with a high chance of a fifth for the BOE, which some analysts consider aggressive.
