Insight Investments is avoiding the short end of the fixed interest market and focusing on longer da...
Insight Investments is avoiding the short end of the fixed interest market and focusing on longer dated issues.
The group's director of fixed interest, Peter Geikie-Cobb, also believes value remains at the long end of the market as the short end now looks expensive.
Geikie-Cobb said: 'All the action has effectively happened in the short end of the yield curve. We think some of this strengthening will begin to unwind. The long end of the curve in this low growth and low inflation environment means a real yield of some 3% which looks quite attractive.'
When it comes to individual government bond markets Insight sees the UK as less attractive on a relative basis to Japan, Germany and the US. The group's policy is to buy overseas bonds and hedge back into sterling.
'The US long bond hedged into sterling gives a 7.5% yield,' he said.
Deflation is a key issue for the bond markets, according to Geikie-Cobb, especially as Japan shows what can happen if the authorities fail to take the necessary action to prevent it.
He said: 'The major central banks recognise the risk of deflation. The US has expanded its fiscal policy so the ingredients to reflate are there although the issue of Iraq is holding people back. Even the European Central Bank is beginning to recognise that its current strategy of a 2% or below inflation target might not be appropriate. The new bank of Japan governor may well be given an inflation target.'
On the issue of US real interest rates, which Geikie-Cobb defined as rates minus inflation, Insight estimates these are actually negative.
'In line with monetary and fiscal policy I think it gives every chance of success,' he said.
For inflation to stand a chance, countries must be able to generate economic growth, accord- ing to Insight. The group's data suggests there has been an uptick in growth in Japan during 2002 and it is picking up in Europe although Geikie-Cobb said 'lots of work' remains to be done.
'With the US, it has on the face of it been a classic V-shape recovery,' he said. 'The leading indicator in the US, the ISM Purchasing Managers Index, suggests this will be sustainable. For the eurozone it is still unclear when measured by the IFO Construction Business Climate Index.'
Turning to commodities, Geikie-Cobb noted the commodity futures index has been picking up since the start of 2001.
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