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Yahoo
5 days ago
- Business
- Yahoo
Hedge funds favour short-dated, convertible bonds if Fed's Powell leaves early
By Nell Mackenzie and Summer Zhen LONDON (Reuters) -Hedge funds say they are prepared if U.S. President Donald Trump fires Federal Reserve Chair Jerome Powell before his term expires next year. The dollar briefly tumbled on Wednesday and long-dated Treasury yields rose on reports that Trump is likely to fire Powell soon. Trump denied the reports. Trump has repeatedly criticised the Fed chief for not cutting rates quickly enough. Four hedge funds shared four ideas on how to trade an early Powell departure. Their views do not represent recommendations or trading positions, which they cannot reveal for regulatory reasons. 1/ RBC BLUEBAY ASSET MANAGEMENT * Macro economic fund * Size: part of the $491 billion RBC Global Asset Management * Founded in 2001 * Key trade: Buy 2-year U.S. Treasuries, sell 30-year Treasuries Trump has said that he would "love" it if Powell were to resign, and has called for interest rates to be cut to 1%. The current range for the key Fed funds rate is 4.25%-4.5%. A new Fed chair would be pushed to cut rates, lowering front end yields, said Mark Dowding, CIO for BlueBay fixed income. Bond yields move inversely to price. Two-year Treasury yields dropped following Wednesday's news reports, while 30-year yields briefly jumped. "Long-dated yields may well move in the opposite direction as Fed independence is undermined and medium-term inflation risks increase," Dowding said. 2/ FOURIER ASSET MANAGEMENT * Convertible bond specialist * Size: $10 million * Founded in 2024 * Key trade: Buy Coinbase convertible bonds Orlando Gemes, CIO and co-founder of Fourier Asset Management, favours convertible bonds issued by crypto exchange Coinbase. These bonds, which provide a steady income and can turn into shares at pre-agreed prices, are the fund's main focus. "Our preference is the 2026 bond given the conversion price of $370.45, while the 2030 bond has a conversion price of $333.55," said Gemes. Gemes does not expect a huge market reaction initially if Powell is fired but believes the result will be inflationary. If rates are cut, the yields on these convertible bonds will fall. "But ultimately a Powell firing... would continue the inflationary nature of the Trump administration," said Gemes. The U.S. Consumer Price Index rose 2.7% in June on an annual basis, versus 2.4% in May. 3/ COLOMA CAPITAL FUTURES * Commodity Trading Advisor (CTA) * Size: Cannot disclose for regulatory reasons * Founded in 2009 * Key trade: sell the dollar David Burkart, founder and CIO of Caloma Capital, says he would sell the dollar against a basket of currencies. "A Powell replacement is extremely likely to be dovish and thus the interest rate differential between the U.S. and other countries will narrow, reducing the relative attractiveness of the dollar," said Burkart. Longer term, the U.S. debt and tax burden is increasing and risks slower U.S. growth which should also weigh on the dollar, he said. Burkart believes the dollar index could potentially fall to 90 and that 80 is "not out of the question." The dollar index, currently trading at around 98.56, has tumbled almost 10% so far this year. 4/UNION BANCAIRE PRIVEE (UBP) * Japan equity long/short hedge fund strategy, market-neutral, governance focused * Size: Part of $200 billion UBP * Founded in 2020 * Key trade: short Japanese exporters, especially those without overseas production bases Zuhair Khan, senior portfolio manager at UBP Investments, who manages a long-short Japan equities fund, said he expects the yen to strengthen and most Japanese stocks to fall if Powell leaves early. The blue-chip Nikkei 225 is down 0.2% so far this year, underperforming other major markets in Asia. Domestic Japanese stocks are likely to fare better than exporters, though all of them are likely to fall, says Khan. Within exporters, Khan favoured picking names with more overseas production aimed at those markets rather than those producing in Japan for export.
Bloomberg
03-07-2025
- Business
- Bloomberg
FTSE 100 Live: Pound Recovers Some Ground as Starmer Backs Reeves
The reaction in bond markets illustrates how jittery they are about the UK's public finances, and any extra uncertainty given the extreme global uncertainty financial markets are already facing isn't welcome. Incidents like yesterday do damage to market confidence in the government, and that means they have to price more risk into UK bonds, which leads to higher borrowing costs and therefore more pressure on the country's finances. 'It takes very little to light the fuse when things are in a bad place,' said Neil Mehta, a portfolio manager at RBC BlueBay Asset Management, on gilts' vulnerability to sudden slides. 'Markets will be on high alert over the next months.'
The Guardian
02-07-2025
- Business
- The Guardian
UK bond yields rise sharply amid speculation over future of Rachel Reeves
UK government borrowing costs have risen sharply amid speculation over Rachel Reeves's position as chancellor, as City investors warned Labour's welfare U-turn had blown a multibillion-pound hole in the public finances. After Keir Starmer failed initially to give his full backing to a tearful chancellor at prime minister's questions on Wednesday, the yield on 10-year UK government bonds had its biggest jump in a day since Liz Truss was in No 10, while the pound slumped. The yield – in effect the interest rate – rose by as much as 0.2 percentage points to trade close to 4.7%, climbing by the most in one day since October 2022 when investor confidence in Britain remained shaken after Truss's mini budget. Highlighting investor unease over the government's tax and spending plans, the pound also fell by more than 1% against the US dollar. Downing Street later insisted that Reeves would remain in her post and had not offered her resignation after a major rebellion by Labour MPs forced the government to withdraw a planned £5.5bn cut to disability benefits. However, investors warned the backtracking, which follows an earlier U-turn on winter-fuel payments for pensioners costing £1.25bn, put Reeves in danger of smashing her self-imposed fiscal rules without sweeping tax rises. 'A fiscal crisis now appears to be on the horizon unless tough decisions (such as tax rises) are enacted. Markets will be on high alert over the next months,' said Neil Mehta, a hedge fund manager at RBC BlueBay Asset Management. 'Last night's parliamentary chaos underscores the government's waning control over public spending. Reeves's October budget has already increased 2025-26 public spending by nearly £100bn compared to the previous government's plans, leading to higher borrowing and worsening inflation.' Reeves has repeatedly pledged to stick to her 'iron-clad' fiscal rules – which require day-to-day spending to be matched by receipts within five years – despite mounting spending pressures and rising debt interest costs. Having committed against further large tax rises after the autumn budget, the chancellor turned to welfare savings in her spring statement to rebuild the headroom against her primary target to £9.9bn after a deterioration in the outlook for the government finances. However, the threat of a backbench Labour rebellion and rise of Nigel Farage's populist Reform UK in the opinion polls has led the government to reverse some of its planned cuts, leading to questions over Reeves's authority. Sign up to Business Today Get set for the working day – we'll point you to all the business news and analysis you need every morning after newsletter promotion Investors warned that Starmer swapping his chancellor and adopting a looser approach to the public finances would probably be poorly received in financial markets, while economists said that tax rises at the autumn budget could be required to rebuild confidence. Kathleen Brooks, research director at trading platform XTB, suggested the rise in bond yields was linked to speculation over Reeves's position during PMQs. 'The PM might be keeping his options open at this stage, but the chancellor is a strange choice to axe from a market perspective.' Benjamin Caswell, a senior economist at the National Institute of Economic and Social Research, said the relatively limited headroom the chancellor had left against her fiscal rules had created problems as the economic outlook turned. 'Once you've established the rule the most important thing is to set yourself credibility against it. If you're having to change course and tinker and make piecemeal ad-hoc adjustments every six months that doesn't convey credibility,' he said. 'There should be serious consideration of raising one of the big three taxes [VAT, income tax, and national insurance] in the autumn budget.'
Telegraph
02-07-2025
- Business
- Telegraph
Borrowing costs rise after Starmer's welfare about-turn
Britain's borrowing costs have jumped in the wake of Sir Keir Starmer's 11th-hour welfare climbdown, amid concerns that Labour is losing control of the public finances. UK gilt yields – the return the Government promises to buyers of its debt – climbed at the steepest pace in Europe on Wednesday morning. The benchmark 10-year yield rose by around four basis points to 4.49pc, double the size of gains seen in France and vastly more than Germany, where 10-year borrowing costs remained flat at 2.62pc. It came after the Prime Minister effectively gutted plans for benefit reforms in a bid to avoid an embarrassing defeat in the House of Commons. Sir Keir still faced a significant rebellion from within his own party on the passage of the welfare bill. The watering down of welfare reforms has blown a £5bn in Rachel Reeves's Budget, in addition to a £1.5bn shortfall created by the earlier about-turn on winter fuel payments. Economists said that a tax raid in the Autumn was now almost certain. However, the collapse of party discipline within Labour has raised concerns that the Government may not be able to tackle problems with Britain's public finances. Experts have warned that state spending is on an unsustainable path as a result of surging sickness benefit payments. Neil Mehta, of RBC BlueBay Asset Management, said: 'Last night's parliamentary chaos underscores the Government's waning control over public spending. 'The Chancellor's October Budget has already increased 2025-2026 public spending by nearly £100bn compared to the previous government's plans, leading to higher borrowing and worsening inflation. 'A fiscal crisis now appears to be on the horizon unless tough decisions (such as tax rises) are enacted.' Mr Mehta said investors 'will be on high alert over the next months'. Matthew Amis, at fund manager Aberdeen, said: 'The market still believes that the fiscal rules are paramount, and inevitably that means tax hikes are coming. Any perceived watering down of those fiscal rules will see a gilt market reaction.' UK borrowing costs climbed at a faster pace than even the US, where investors were digesting the Senate's approval of Donald Trump's tax cutting plans. US Treasury yields rose to 4.28pc after vice president JD Vance used his casting vote to secure passage of the 'One, Big Beautiful Bill', which is expected to add $3.3 trillion (£2.4 trillion) to America's federal deficit if it makes it through the House of Representatives.
Japan Times
27-06-2025
- Business
- Japan Times
No love for the dollar as markets fret about Fed independence
A battered dollar is taking another beating as investors, unnerved by fresh signs of an erosion in U.S. central bank independence, waste no time in pushing the greenback back to its lowest levels in over three years. President Donald Trump on Wednesday called Federal Reserve Chair Jerome Powell "terrible" in his latest attack on the Fed chief and said he has three or four people in mind as contenders for the top Fed job. The dollar was back at multiyear lows against a basket of other major currencies on Thursday, erasing a brief respite provided by safe-haven flows related to Middle East tensions earlier in the week. Down 10% so far this year and set for its worst year since 2003, the dollar was expected to weaken further as renewed concern about Fed independence comes amid increased expectations for rate cuts and a looming July 9 deadline for trade agreements. "We are short the dollar in this environment, where there is an erosion of institutions," said Kaspar Hense, a senior portfolio manager at RBC BlueBay Asset Management. Being "short" a currency means holding bets it will fall in value. "This is not currently 100% in the price, and it would still move markets if someone like Hassett or Bessent would get the job in order to cut rates, ignoring fundamental risk," Hense said. The leading contenders for next Fed chief reportedly include former Fed Gov. Kevin Warsh, National Economic Council head Kevin Hassett, current Fed Gov. Christopher Waller, and Treasury Secretary Scott Bessent. "I think the market is pricing in President Trump appointing someone who at least at first sight appears more sympathetic to his cause," said Societe Generale chief FX strategist Kit Juckes. U.S. President Donald Trump called Federal Reserve Chair Jerome Powell "terrible" in his latest attack and said he has three or four people in mind as contenders for the top Fed job. | REUTERS Comments earlier this week, meanwhile, by Fed policymaker Michelle Bowman, recently tapped by Trump as the Fed's top bank overseer, that the time to cut rates is getting nearer weakened the dollar as rate-cut expectations rose. Traders now price in a nearly 25% chance of the Fed cutting rates in July compared to 12.5% last week. Trump's confrontations with longstanding allies over trade and security, and his attacks on the Fed, have revived questions in Germany around its holdings of central bank gold, some of which is stored at the New York Fed. And European Central Bank supervisors are asking some of the region's lenders to assess their need for dollars in times of stress, gaming out scenarios in which they cannot rely on tapping the Fed under the Trump administration, it was reported last month. Nick Rees, head of macro research at Monex Europe, said the big short-term risk for markets was that the Fed criticism continued. "I'll be perfectly honest, I'm currently rewriting them in light of what we are seeing right now," he said, referring to short-term currency forecasts. "We had thought the dollar should stabilize around current levels because the macro data is about to turn really quite positive." ING said the euro's break above $1.17 put $1.20 firmly in sight, although sentiment toward the greenback would have to deteriorate further to get there. Seema Shah, chief global strategist at Principal Asset Management, noted that the dollar had not benefited as much as expected in the past two weeks from heightened Middle East tensions, a sign the dollar's safe-haven role had been hurt. In recent years, the currency has risen when oil rallies, but it gained just 0.7% last week. The dollar, the world's No.1 reserve currency, has come under fire this year from erratic U.S. policymaking that has exacerbated economic uncertainty and put the notion of U.S. exceptionalism into doubt. Concern about Fed independence adds to the damage, investors said. Respect for independent institutions such as central banks has long been viewed as a key attraction of major economies, helping anchor economic stability and provide policy certainty. A survey of 75 central bank reserve managers published earlier this week by think tank OMFIF showed that 70% of those surveyed said the U.S. political environment discouraged them from investing in the dollar — more than twice the share a year ago. "Talk about having the next Fed chair announced within the next couple of months, that would be fairly disruptive," said Shah. "It brings up the whole concern about the credibility and reliability of U.S. institutions again, which is typically something that people don't like."
