Bond Fund Managers Jump Off the Neutral Fence Amid Eventful Week

By Rom Badilla, CFA

September 10, 2012

Fresh after Federal Reserve Chairman’s speech at Jackson Hole and prior to the ECB meeting, more Active Bond Fund Managers jumped off the fence and made bets on the direction of interest rates in the U.S. Treasury bond market. According to JP Morgan’s U.S. Treasury Client Survey, the number of Active Bond Fund Managers who were neutral declined and migrated toward either a bullish or bearish view.

For the survey ending September 4, the amount of clients who did not make a bet entering the week declined from 85% to 62%. This led to an increase in the bullish camp by 8% to 23% of the total while those who made bearish bets and higher interest rates, increased from nil in the previous week to 15%. The 4-week moving average of bulls and bears of this particular survey stands at 15% and 10%, respectively.

An Active Bond Fund Manager are clients who utilize more interest rate bets as part of their strategy and may deviate their durations from their benchmarks more frequently. Conversely, one who does not utilize interest rate bets can provide value to fund holders via other means such as sector rotation (i.e. underweight Corporate Bonds in favor of High Yield) and individual security selection.

As result of more clients making bearish bets than those betting for a rally, the JP Morgan Active Client Sentiment Survey declined. Despite this, the index still remains in bullish territory. The Sentiment Survey fell from 118% in the prior week to 110%. A Sentiment Survey with a reading below 100% generally equates to Bearishness or shorting Treasuries and a print above suggests Bullishness or going Long Treasuries. A reading of 100% suggests Neutral or no active interest rate bet relative to their benchmarks.

As for All Bond Managers which like the Active survey, there were less neutral players than the previous week led to more bearish bets. The number of bond fund managers who were making no bets dropped from 75% to 68%. This led to an increase of bears by the same amount to 11% of the total and is now above the 4-week moving average of 8%. The percent of bulls remained the same at 21% from the prior week which is near its 4-week moving average.

This pushes the All Client Sentiment Survey lower on the bullish spectrum and closer toward neutral. The index now stands at 113% which is lower from the recent high of 122% establish last week. As a source of context, the recent low was set in June 2011 when the survey reached 71%.

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