Bloomberg News

Selling U.S. Treasuries Leads Standard Life to Australia

November 28, 2012

Edinburgh’s largest fund company sold Treasuries because it’s confident that politicians will find a budget compromise and avert another recession while the Federal Reserve stokes U.S. economic growth.

Standard Life Investments instead is favoring Australia’s AAA-rated bonds due to the country’s tightening fiscal policy, prospects for lower interest rates and “decent credit worthiness,” said Sebastian Mackay, an investment director for fixed income. The firm also bought German bonds as Europe faces a “prolonged” period of low growth and interest rates.

U.S. Treasuries have beaten both German bunds and Australian bonds since President Barack Obama won re-election on Nov. 6 as investors opted for a safer home for their money on concern about the so-called fiscal cliff, or $607 billion of automatic tax increases and spending cuts starting in January. Obama, a Democrat, proposed cutting the deficit by reducing spending and allowing predecessor George W. Bush’s tax cuts for high-income earners to lapse. Republicans oppose tax increases.

“We’re at the more relaxed end of the spectrum on the fiscal negotiations, given the Democrats overriding motive to avoid the cliff and the Republicans’ motive to maintain the Bush tax cuts,” Mackay said in an interview. “We are not positive on Treasuries at this juncture.”

Shifting Returns

The U.S. economy will advance by 2 percent in 2013, compared with an average 1.26 percent for the Group of 10 nations, according to Bloomberg surveys of economies. Over the course of 2014, the U.S. will exceed the G-10 average by 0.82 percent points, the surveys show.

Treasuries have returned 0.7 percent, while German government debt has lost 0.1 percent since Nov. 6 and Australian government bonds handed investors a 0.3 percent loss, according to data compiled by Bank of America Merrill Lynch.

U.S. government bonds may underperform as monetary stimulus succeeds in restoring economic growth in the U.S., Mackay said in the interview on Nov. 21.

Within the Treasury market, Standard Life is switching from 30-year bonds to those maturing in 10 years because the so- called yield curve will steepen as the impact of the Fed’s Operation Twist diminishes, according to Mackay.

The Federal Reserve Bank of New York started undertaking the $667 billion Operation Twist in October 2011, selling short- term securities and swapping them for longer-term debt in an attempt to keep borrowing costs low and support growth.

Managing Bonds

The program is scheduled for completion by year-end. The policy helped push the 10-year Treasury yield down to 1.62 percent at 6:44 a.m. New York time, from 1.92 percent on Sept. 30, 2011, according to Bloomberg Bond Trader prices. Standard Life Investments managed 163.4 billion pounds ($261 billion) in assets at the end of the third quarter.

Mackay is part of a team that oversees about $100 billion of global fixed income. The 1.1 billion-pound Standard Life Global Index-Linked Bond Fund gained 3.35 percent this year compared with an average return of 6.96 percent for its peer group, ranking it 78th out of 102 funds, according to data compiled by Morningstar Inc. (MORN:US)

The 98 million-pound U.K. Gilt Fund managed by Mackay since Feb. 1 returned 1.14 percent this year, ranking it 26th of 31 similar funds tracked by Morningstar Inc. The average return was 1.63 percent, data compiled by the research firm show.

To contact the reporter responsible for this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net;

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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