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Bond fund manager: I hate bonds

Tuesday, 5 Nov 2013 | 4:54 PM ET
Bond fund manager: Why I hate bonds
Tuesday, 5 Nov 2013 | 1:12 PM ET
Stewart Cowley runs a billion-dollar bond fund, but he hates bonds so much, he's decided to get net short. He explains why, to CNBC's Jackie DeAngelis and the Futures Now Traders.

It may be rare for a fund manager to talk down the very asset class he's investing in. But bond fund manager Stewart Cowley is so bearish on bonds, he's actually taken a net short position that benefits when bonds drop.

"The bond bear market started in August 2012, and frankly, long-term interest rates should be about 1.5 percent higher than they are today," Cowley said on "Futures Now" on Tuesday. "And that means substantial capital losses coming in what is a rigged market in the United States."

When Cowley says the market is "rigged," he's referring the to outsized role played by the Federal Reserve. The Fed has been buying $45 billion worth of Treasurys and $40 billion worth of mortgage bonds every month. This has boosted Treasury prices, and suppressed yields.

(Read more: Bond prices fall as US services data surprise)

But Cowley, who is the head of fixed income at Old Mutual Global Investors, predicts that this quantitative easing program will soon come to a close.

"The process has reached an end now," Cowley said. "The reality is the America doesn't need quantitative easing anymore."

Many had expected the Fed to announce a tapering of their QE program in September, but the Fed kept the pace steady. Now many banks, such as Goldman and Barclays, expect the Fed to start tapering in March.

Once this process begins, rates are likely to rise precipitously, which could cause a lot of pain for bond investors (given that bond prices move inversely to yields).

(Read more: The market is getting the Fed all wrong: Nomura)

If yields rise even just the 1 to 1.5 percent Cowley is anticipating, bondholders could experience "double-digit losses — like, equity-type losses in so-called safe government bonds," he said. "It's as simple as that."

—By CNBC's Alex Rosenberg. Follow him on Twitter: @C NBCAlex.

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