Why one Fidelity manager has sold most US Treasuries

A Fidelity International money manager has sold the vast majority of US Treasuries from funds he oversees on expectations the world’s biggest economy still has room to expand.

Singapore-based George Efstathopoulos, who helps manage about $3 billion of income and growth strategies at Fidelity, sold the bulk of his 10-year and 30-year Treasuries holdings in December. He is now turning to assets that typically do well in times of good economic growth to boost returns.

“We don’t expect sort of a recession anymore,” said Efstathopoulos. “The probability of no landing is still small, but it’s been increasing. If that increases much more, potentially we will not be talking about Fed cuts anymore” in 2024.

Efstathopoulos is among those cooling on Treasuries as the US economy’s resilience forces investors to rethink bets on interest-rate cuts. Some are going a step further, speculating the Federal Reserve’s next move may even be a hike, after the recent strong inflation and jobs reports.

Traders are now pricing under four quarter-point interest-rate cuts in 2024, down from wagers for 150 basis points of cuts this year starting March. Bonds are reflecting the swing in sentiment, with 10-year US yields advancing more than 40 basis points since the start of the year to 4.3%, as comments from Fed officials also reinforce expectations of higher-for-longer rates.

Fed Vice Chair Philip Jefferson warned on Thursday about the dangers of easing too much in response to easing price pressures, while Fed Minneapolis President Neel Kashkari said “we still have some work to do” on inflation. 

Efstathopoulos sold Treasuries as concern over US growth faded. The asset is typically less attractive amid elevated borrowing costs, and when prices reflect the Fed’s median forecast of three quarter point interest-rate cuts this year.

He also sold bonds from other developed markets, including gilts and bunds, while leaving some exposure to inflation-linked US government debt and an idiosyncratic position in Austrian bonds.

The US economy is showing “more signs of re-acceleration than it is of slowing down,” Efstathopoulos said, adding that “I wouldn’t be surprised in a couple of quarters down the road we end up seeing sort of manufacturing PMI in a more expansion sort of territory” in developed markets.

Data on Thursday reinforced his view as US jobless claims dropped to the lowest level in a month, underscoring the strength of the economy. 

Still, funds such as Jupiter Asset Management are taking a different view, opting to load up on Treasuries while seeing risks of a hard landing after the Fed’s most aggressive tightening cycle in decades. 

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Efstathopoulos helps oversee a number of strategies, including a global multi-asset growth and income fund that gained 5% in the year to Jan. 31, according to a company factsheet.

In comparison, the Bloomberg Global-Aggregate Total Return Index of worldwide investment-grade bonds rose about 0.9% in the same period. The fund had dropped 2.31% over a three year period, the factsheet showed.

Efstathopoulos took profit on a top money-making bullish India equities trade last month as prices soared, rotating instead to US mid-cap and Greek stocks. He also likes Japanese banks.

The strategy is now more positive on stocks but “very underweight duration,” he said, referring to a measure that typically reflects the sensitivity of a bond portfolio to changes in interest rates.

“We’ve gone through a massive disinflation period and growth seems to be OK, and the labor market seems to be OK,” he said. “If this is where we land, this is a great place.”