After QE3 Bond Managers Huddle Toward Neutral on Outlook for Yields

By Rom Badilla, CFA

September 19, 2012

After last week’s announcement of Quantitative Easing 3 by the Federal Reserve, Active Bond Fund Managers pared their bets on the direction of interest rates. According to JP Morgan’s U.S. Treasury Client Survey report, the number of Active Bond Fund Managers who were either bearish or bullish on bonds declined.

There was less conviction among Active Bond Fund Managers on the direction of bond yields. The number of clients that were bullish and betting for lower yields fell by 8% to 15% for the survey ending September 17. Coincidently, the amount of managers who were bearish fell by the exact same amount. As a result, managers who positioned their portfolios to be neutral with no bet increased from 54% in the previous week to 70%.

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 a result the JP Morgan Active Client Sentiment Survey index remained at 100% for the second straight week. 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 a source of context, the highest reading was at 138% set on July 23, 2012 when the 10-Year was trading at 1.43%. Bond fund managers were bullish amid uncertainty from both the European Debt Crisis and a slowdown in U.S. economic growth. The recent low in the survey where managers were betting for higher yields occurred March 2012 when the survey hit 75%. The 10-Year U.S. Treasury was trading at 2.03% that week and ended up reaching a high of 2.38% due to improving economic data.

As for All Bond Managers which like the Active survey, there were more neutral players than the previous week. The number of bond fund managers who were making no bets edged higher from 62% to 64%. This led to a decrease of bulls by 2% to 21% and is close to the 4-week moving average of 22%. The percent of bears remained the same at 15% from the prior week which is above its 4-week moving average of 11%.

This pushes the All Client Sentiment Survey lower on the bullish spectrum and closer toward neutral. The index now stands at 108% which is lower from the 110% level established last week. As a source of context, the recent low was set in June 2011 when the survey reached 71% while the recent high of 122% occurred at the end of August.

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