The US Federal Reserve is continuing along its tightening path and basically saying to emerging markets "it's our currency but your problem".
“Almost every recession in the post-war era has been brought about by the Fed raising interest rates until something breaks,” he said. “Add to this the fact that we have seen two big drops in stock markets this year and yield curves are flattening, and the signs are all there.”
So how is the fund positioned right now?
For starters, the average credit rating is a lot higher than usual: today it is A, whereas it has been BB for most of the last 10 years.
Mr Bezalel likes US Treasuries because he does not think the yield can go much higher and also likes Australian government bonds. “Australia hasn't had a recession for 27 years,” he explained.
“Consumer debt is high and savings rates are low. There have been lax lending practices from the banks and belatedly, they are tightening up their practices, but this means credit is drying up fast. House prices in Melbourne and Sydney are already down about 20 per cent.”
The bonds he holds have durations of about 12 years.
He also has some exposure to short-dated emerging market bonds, where he is finding some great yields on soon-to-mature bonds. An 8 per cent yield on a Sri Lankan bond that expires this coming January, for example.
On the other side of the coin, he's not so keen on US and European high yield and is short a basket of such credits.
“By the end of 2019, quantitative easing methods will have restarted,” he concluded. “Unconventional policies will be with us for a long time to come.”
Darius McDermott is managing director of FundCalibre
