JPMorgan’s Bond-Market Contrarian Sticks to Big Wager on Cash

(Bloomberg) -- William Eigen isn’t about to apologize for his bond fund’s performance this year.

Yes, his $8.7 billion JPMorgan Strategic Income Opportunities Fund is trailing about 60% of its peers after trouncing nearly every one of them last year. But to him, that misses the point. His risk-averse clients appreciate, he says, the stress-free and steady nature of the 2.2% return he’s generated so far in 2023 by keeping the bulk of the portfolio in cash.

“It’s been a very smooth 2%, very easy, very nice, no volatility.” In other words, the exact opposite of the wild swings that have produced a slightly better average return for his peer group — 2.4%, according to data compiled by Bloomberg.

Eigen also sounds as convinced as ever that the economic diagnosis that underpins his strategy — that inflation will remain stubbornly high because the labor market is still too hot — is spot on. 

“People are getting this wrong,” he said in an interview. Pandemic stimulus “has unleashed this inflation beast that is not going to go away anytime soon.” And so the Federal Reserve will have to keep interest rates high for a while, he says, making the annual rate he’s getting in a JPMorgan money-market fund — a bit above 5% — a better investment than five- or 10-year notes yielding less than 4%.

Eigen has become something of a foil to the yields-are-about-to-sink crowd on Wall Street. Their view, which is now something of a consensus, is that the economy is starting to buckle and will take inflation down with it, and this in turn will prompt Fed policy makers to pivot as soon as year-end from rate hikes to cuts. This camp received another important voice in recent months in the form of Scott Solomon, who co-manages the T. Rowe Price Dynamic Global Bond Fund.

Solomon was aligned with Eigen back in 2022. The managers moved to shield their portfolios in the face of the Fed’s aggressive tightening, and their funds were alone among the roughly 200 peers that Bloomberg screened in December that generated a positive return last year, when the bond market suffered an unprecedented rout. Both oversee funds that have more flexibility than a typical bond fund in terms of where in fixed income they can invest.

Solomon, who co-manages the $4.2 billion fund with London-based Arif Husain, is still wary of inflation, but is preparing for the end of the tightening cycle as the economy slows. He expects the Fed to keep the benchmark rate steady Wednesday, after 10 consecutive hikes, and signal a slower pace of increases going forward — one every three months or so.

“As you march towards the end of the cycle, the US yield curve will normalize,” he said.

That’s prompted him and Husain to boost their fund’s interest-rate exposure by adding more five-, and 10-year Treasuries and to use futures to bet that the spread from five to 30-year yields will steepen.

The curve trade has gone against them in the past month, leaving the fund down 2.9% this year and behind nearly all of its peers. Solomon said he’s confident the trade will prove profitable over the longer run.

On Tuesday, the position got a boost as the yield curve steepened in the wake of a report showing US inflation slowed in May, buoying the argument for a Fed pause.

Eigen, meanwhile, isn’t even tempted to push out the curve. 

“Since the beginning of the year, everyone’s been preaching recession and that’s worked out terribly for them,” he said. 

Informed in part by his experience as owner of an athletic facility in Rhode Island, he’s unswayed by arguments that weaker growth will bring the inflation rate all the way back down. His business — a multifaceted venue featuring everything from a gym and hockey rink to an indoor track and restaurant — is telling him the labor shortage has only gotten worse. While he’s raised wages, staff still quit before long. The cost of running the venue keeps climbing and he boosted the monthly gym membership fee this year, to $69 from $49. He still has more customers than ever.

Cash Preference

As of the end of April, his fund had 66% of its assets in cash — in a money fund holding instruments such as Treasury bills and commercial paper — and 23% in investment-grade credit.

Eigen says the Fed may lift rates another half-point, pushing its benchmark toward 6%.

“The next 10 years in fixed income are not going to be like the last 40,” he said. The investing landscape was “permanently changed” by the Fed’s failure to ward off inflation as the economy rebounded from pandemic lockdowns, he said. “They kept zero rates in place way too long” and “once inflation is released, once you give manufacturers and producers that pricing power, it is not going away. And as a business owner I can confirm that.”

(Updates with inflation report, market reaction.)

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