Chinese Family Office Buys Treasuries on U.S. Recession Bet

(Bloomberg) -- Kamet Capital Partners Pte, an investment firm managing funds for two wealthy Chinese families, is piling into two-year Treasuries on wagers the U.S. economy will enter a recession as early as next year.

The Singapore-based company reduced its cash holdings in favor of the short-term government notes -- one of the safest parts of the Treasuries curve -- between July and September, Kamet Chief Executive Officer Kerry Goh said in an interview. The position now makes up 7 percent of the firm’s portfolio, even though cash reserves remain high at 30 percent from 40 percent earlier.

“The allocation to the front end is for both flight to safety and attractive higher short-term yield,” said Goh, who headed Asia portfolio management at Julius Baer Group Ltd. before setting up the firm. “Next year, recession risks can become real."

Kamet’s shift to Treasuries underscores concerns shared by investors about the state of the global economy, after 2018 saw a slump in all types of asset classes from stocks and bonds to commodities. An inverted spread between shorter and longer-term Treasury yields -- a possible recession indicator -- has also fanned worries that a downturn in the world’s biggest economy may not be far away.

The spread between 3- and 5-year Treasury yields fell below zero for the first time this month since 2007, and the 2- to 5-year gap soon followed. While the 2- to 10-year part of the curve is more closely watched as a potential signal of pending recessions, the inversions may indicate the market is anticipating the Federal Reserve’s tightening cycle could be approaching an end.

The yield on 2-year Treasuries was at 2.73 percent Tuesday, up from 1.88 percent at the end of last year. Ten-year notes were yielding 2.87 percent, down from 3 percent at the end of November.

Kamet is looking to buy more of the notes “at the right price,” Goh said. He declined to disclose the company’s assets under management, though the firm’s license limits the total to S$250 million ($182 million), according to its registration with the Monetary Authority of Singapore.

“We started off expecting the market to reprice from its high valuation and next price in a recession some time next year,” said Goh. “Net net we are still not sanguine. A rate pause would be good for the market short term but a cut would mean a confirmation of recession.”

Goh is not alone in worrying about a U.S. recession. JPMorgan Chase & Co. sees a 35 percent chance of a slowdown next year, close to the highest probability in the current cycle and up from 16 percent in March. A UBS Group AG study of 40 countries over four decades found the U.S. to be among those currently behaving in a way inconsistent with prior peaks.

BlackRock Inc. is also warming to U.S. Treasuries, favoring shorter-term notes. While the world’s biggest money manager sees little chance of a U.S. recession in 2019, bonds help provide a ballast from rising global risks, said Gregor Carle, head of APAC fixed income and credit product strategy at a briefing in Singapore.

Market Swings

Big market swings probably will continue into 2019, after “too-fast” rate increases from the Fed, other central bank measures to reduce excess liquidity, and uncertainties coming from the U.S.-China trade war, Goh said.

Kamet’s next-largest holdings remain in alternative assets including private equity and venture-capital funds while equity investments are way under 20 percent, according to Goh.

“We continue to invest in good growth companies as we believe the innovations will support the growth of companies through recession,” he said.

To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net;Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, ;Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen, Russell Ward

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