An Anomaly In The Long Bond Market?

Long term government bond yields look very attractive, according to the managers of the Thames River Capital Global Bond Fund, Paul Thursby and Peter Geikie-Cobb. The biggest positions in their popular fund, up 34% in last year’s exceptional conditions, are in the longest dated UK gilts and US Treasuries, the former currently yielding 4.5%. This looks very tempting, given that, even if (like me) you are a believer that inflation will eventually return as a result of unprecedented Government and central bank activity, published inflation figures are not going to be positive for a long time yet. The real yield on long-dated government bonds looks a bargain therefore, though nobody in their right minds would voluntarily think of lending money to the UK government at shorter-dated rates.

I find this argument convincing, and have added some of these gilts to my own portfolio. Whether it turns out to be a hedge or a trade remains to be seen. (I will not be around to hold these instruments to maturity, alas). Sterling will also continue to strengthen, the Thames River Capital team thinks, and could well reach $1.70 and 1.30 to the euro before it is done. The euro looks most at risk. The two Thames River bond managers have never held such a long duration government bond portfolio as they do today, despite nearly 20 years investing in the field. They are also fully hedged back into sterling.

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