Ultra-long duration bonds have been subject to elevated volatility in recent years over fears of rising fiscal deficits.

But outside of the US, global concerns about fiscal deficits are largely “overdone”, according to François Collet, chief investment officer of DNCA (main picture).

“We have concerns in the US where you have very large fiscal deficits and there is no willingness to cool down these deficits, but if you look almost everywhere else, except maybe in France, we see a normal fiscal situation,” he said.

“Japan is at a 3% deficits, UK is at 4.4%, but is on a positive path, other Eurozone countries like Italy, Spain are doing the job. Yes, Germany is having a kind of fiscal push, but they are coming from a very strong fiscal situation – so at the end of the day, I think that global fiscal concerns are overdone.”

However, Collet acknowledged that the global fiscal situation is far from ideal for bond markets.

“Central banks were buying bonds, they aren’t anymore, and some of them are selling long-term govvies,” he said. “That’s why we prefer investing in 10-year bonds.”

10-year duration preferred over 30-year

Collet said: “In 10-year bonds, the carry still matters, while in 30-year bonds the duration is so high, an 2% additional carry – which is not the case by the way – you just need a 10 basis point move in a year to absorb the additional carry.”

Even if there may be some opportunities at the long end of the curve, Collet prefers to stay away. However, he did note that bond markets have seen the rebuilding of what he considers “normal” term premium, which is likely to stay.

“I think that governments are totally aware that these large fiscal deficits, large quantitative easing, pushed inflation upwards much more than what they thought initially,” he said.

“They won’t come back to these policies – meaning that term premiums are going to stay around where they are today.”

Therefore while he tends to stay away from 30 year bonds, Collet sees value in 10-yr govvies almost worldwide including Europe, UK, Japan, Australia and New Zealand.

A different story for the US

But when it comes to US government bonds, Collet is concerned about a potential uptick in inflation and has all of his US govvy exposure through inflation-linked bonds.

“We think it’s a much safer way to invest in the US,” he said.

Collet thinks the US administration’s pressure on the US central bank has already created a degree of loss of independence.

“I think they’re already in a defensive mode, and this defensive mode is already a kind of loss of independence,” he said.

 “The US administration is putting maximum pressure on the Fed to get what they want – and what they want is lower short term rates and to fund the short end of the curve.”

“Lower shorter rates will help them to have a lower US dollar, which is going to help them to relocate industry to the US. I think the agenda is pretty clear and I don’t really see the Fed winning the fight.”