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A Fund That Beats 98% of Its Peers Is Shorting the Dollar

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A Fund That Beats 98% of Its Peers Is Shorting the Dollar

  • BNY Mellon’s Murphy favors Japanese yen and Norwegian krone
  • Portugese government bonds were biggest contributor to gains
Photographer: Andrew Harrer/Bloomberg

A bond fund manager who beat global peers over the past year is shorting the dollar on expectations economic growth outside of the U.S. will strengthen.

The greenback will slip against most major currencies as nations from Japan to the U.K. see better growth, spurring higher rates in those markets, said Brendan Murphy, head of global and multi-sector fixed income at BNY Mellon Asset Management North America. Murphy, who manages the $1.1 billion Dreyfus International Bond Fund, is shorting the dollar in favor of long positions across currencies including the Japanese yen and Norwegian krone.

“The U.S. dollar still looks expensive to us -- we’re in the early stages of a U.S. dollar-depreciating trend,” said Murphy. The yen is “very cheap” and could strengthen to 100 against the dollar by year’s end, he said.

The Dreyfus fund has returned 11 percent over the past year to beat 98 percent of comparable peers, based on data compiled by Bloomberg. Four rate hikes by the Federal Reserve since the start of last year have failed to spur the greenback, with the Bloomberg Dollar Spot Index down 8.5 percent in 2017. The index has extended losses this year, bruised by rising trade tensions with China and worries about America’s burgeoning twin deficits.

The yen traded at 107.17 against the dollar at 10:12 a.m. London time on Monday. Speculation that the Bank of Japan may start to normalize policies, and demand for haven assets, have led to the currency rising more than 5 percent against the greenback this year.

Catching Up

“The market has priced in the tightening cycle in the U.S. versus the rest of the world,” said Murphy. “From a currency perspective, you’d expect as other central banks start to tighten in the next few years, that those currencies appreciate and catch up.”

The market is taking a similar view on the dollar. Hedge funds and other large speculators boosted net bearish bets on the greenback to the most since January 2013, according to data from the Commodity Futures Trading Commission.

The Federal Reserve will probably take the policy rate to around 3 percent by the end of 2019, with inflation edging higher slowly, said Murphy.

The fund is also buying Japanese inflation-linked bonds, with Murphy expecting the nation’s inflation to surprise even if it’s a distance away from Bank of Japan’s 2 percent target.

“It’s really cheap insurance; we do think Japanese inflation will surprise to the upside to what’s priced in,” he said.

The following are excerpts from a Q&A.

1. Portugal was the biggest contributor to performance last year

It was a cheap, high-yield developed market and an improving credit story. Emerging market guys won’t buy Portugal because it’s a developed market, and the developed market guys didn’t buy it because Portugal didn’t meet their investment criteria. Bonds that used to trade at 7 percent yields in 2013 now trade similar to Italy, depending on where you are on the curve. That spread compression will continue.

2. Spain is next opportunity

We love the long end, the 30-year part of the curve. Spain is different from Portugal as it’s going from ‘BBB’ to ‘A.’ Their bonds are also eligible for central bank buying. So as long as the spread is there, that’s where our focus has been.

3. European FX to outperform dollar

We like emerging-market currencies such as the Argentinian peso, Columbia peso. We’re constructive of the euro versus the dollar, but we’re even more constructive on other European currencies versus the dollar. We like the Scandinavian currencies and the British pound.

4. Trade war is unlikely

I don’t want to dismiss the trade war rhetoric but our view is that it’s more of a negotiating tactic. Trump is trying to fulfill his campaign promises -- last year was about tax policy, this year the focus is trade. An all-out trade war will be very disruptive for the economy, equity markets, for risk assets. That type of volatility is going to be problematic for the administration.

(Updates with yen’s performance in fifth paragraph.)