UK corporate bonds remain attractive despite a narrowing of yields following a third quarter rally i...
UK corporate bonds remain attractive despite a narrowing of yields following a third quarter rally in the bond market. Corporate debt appears strong, even in the current environment of rising interest rates and inflationary pressures.
Christine Furquhar, head of treasury and fixed income at Clerical Medical, remains positive on corporate bonds.
She says: "Our view is the market is at the top end of its trading range. Some 30% of our funds have holdings in corporate bonds now, compared with only 10% a year ago, and we intend to hold that position."
She has increased bond exposure and will look to do so again should new issuances, particularly in the financial services sector, meet her criteria.
Nick Hart, fixed income investment manager for Deutsche Asset Management, is a little more cautious, running neutral on corporate bonds, although he remains positive on the sector relative to gilts.
He says 10 year swap spreads have stabilised after corporate bond index spreads reached a peak of 135 basis points at the end of June.
They have now fallen back to 111 basis points and although slightly less active, Hart says he does not expect them to drop significantly over the coming months.
The basis of the corporate bonds rally last quarter stemmed from speculation regarding the upcoming review of the pension funds industry.
Jeremy Baldwin, manager of Colonial First State's corporate bond portfolio, says the Institute of Actuaries desire to broaden the Minimum Funding Requirements (MFR), to include BBB investment grade companies rather than just AAA companies, has provided a significant boost to all corporate bonds.
Farquhar agrees that any possible extension for MFR will be bullish for corporate bonds.
She adds that there is disagreement between the Treasury and DSS over the approach to adopt with the Treasury appearing to be pushing for increased risk and returns from pension funds.
Baldwin agrees there is a demand for asset classes to be broadened, in acknowledgement of pension funds underinvestment in equities.
Once the MFR review and the Myner's report are released, Baldwin expects the eventual outcome, whichever route is taken, to be favourable for corporate bonds.
Although Farquhar is positive on both Government and corporate bonds, she stresses that shrewd stock selection is the key, adding that there are concerns about some sectors and their credit worthiness.
Baldwin prefers multinationals, on the basis they have little default risk and anticipates a fairly constant demand for them over the next two quarters.
Telecoms remain risky, says Farquhar, who believes the supply of stock is too volumous. Hart acknowledges the wealth of supply but is less concerned in light of the recent third generation mobile licence auction in Italy. With the auction realising E12bn, only half of what was expected, Hart says some of the risk has been taken out of the market.
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