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Cannot Turn Off Tightening Just Yet

Report: Systematic Strategies

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Stockholm (HedgeNordic) – Fixed-income hedge fund manager Thomas Pohjanen believes policy interest rates will continue to rise in Sweden and Europe, while the United States fed funds rate is already approaching the lower end of a neutral range. Central banks around the world are on a path of tighter monetary policy in an effort to get to grips with surging inflation.

Inflation rates in Sweden and the Eurozone are higher than in the United States. “In the US, inflation has landed between 8 and 8.5 percent over the past three months, well above the inflation target of 2 percent,” according to Pohjanen’s latest letter to investors. In October, Swedish inflation reached an annual rate of 9.7 percent, while inflation in the Eurozone was at an annual rate of 10.7 percent. “The central banks cannot yet turn off the pace and we expect a tough monetary policy until inflation falls back over a longer period,” writes Pohjanen. “Even after policy rates reach their plateau, central banks will aim to maintain the higher interest rates for a longer period to be sure that their low single-digit inflation targets are really met.”

“The central banks cannot yet turn off the pace and we expect a tough monetary policy until inflation falls back over a longer period.”

In an interview with Placeringsguiden, Pohjanen draws similarities between the low interest-rate environment in recent years and the environment that preceded the financial crisis of 2008. “So many years with such low interest rates resulted in large parts of the economy getting used to money being free,” Pohjanen tells Placeringsguiden. “This leads to excess borrowing, which we have seen several times in recent history. While it’s going on, it can be difficult to see where the overleveraging is happening, but it usually ends with some kind of inflationary bonfire that the central banks then have to fight.”

Pohjanen also highlights the advantages of running a flexible, active fixed-income hedge fund over traditional long-only fixed-income vehicles. “I usually say that running a long-only fund is like buying a car that can only drive forward,” Pohjanen tells Placeringsguiden. “It feels much more interesting with a car that can also reverse, or in our case, a fixed-income fund that can make money when interest rates rise and fall,” elaborates the co-portfolio manager of Excalibur Fixed Income. “You cannot make money from classic fixed-income funds when interest rates rise. This is where we offer an alternative.”

Excalibur Fixed Income gained 3.7 percent in the first ten months of 2022. The fixed-income macro hedge fund managed by Thomas Pohjanen and Björn Suurwee is one of the few fixed-income hedge funds in the Nordics with a positive return so far in 2022. Excalibur Fixed Income is the best-performing fixed-income hedge fund in the Nordics over the previous 36 months with a cumulative return of 21 percent.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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