The short end of the US and UK government bonds sector is favoured over corporates as market volatil...
The short end of the US and UK government bonds sector is favoured over corporates as market volatility continues.
Jonathan Arthur, managed portfolio fund manager at Deutsche Asset Management, said he is underweight bonds relative to his benchmark, believing that if the market is good for bonds, it is better for equities. He is, however, currently holding 13.25% of the fund in bonds, his highest exposure in more than six months.
Of this, 6.3% of the fund is in international bonds and 6% in UK bonds. The international bond holdings are split 45% in Europe, 30% in the US and 23% in Japan. Arthur's international bonds are predominantly in the short end of the market, typically three years or under. Murray Allan, a director of Baillie Gifford's institutional investor section, claims he is running close to neutral both bonds and cash.
Allan currently prefers US Treasuries to gilts, holding 4% of the fund in US Treasuries versus 3.7-3.8% in gilts. He says: "We prefer the dollar to sterling and US index linked Treasuries yield twice as much as UK ones." Allan is not keen on the long end of the bond market, particularly UK long end gilts, which he deems overpriced for a low yield.
The outlook on corporate bonds differs. Arthur has 10% of his international bond exposure in US corporates and 3% European corporates. He says: "Ours is not a very aggressive fund and it's hard to lose money on US and European corporates in the short term." Arthur notes that 35% of his sterling bond exposure is in corporate, and includes BT.
Allan meanwhile has a marked preference for government bonds versus corporates. Of his UK bond weighting, 1.7-1.8% is in corporates his sole exposure. Among others, he holds Abbey National, Barclays, and Lloyds TSB corporate bonds.
Allan explains: "We are pretty sanguine about their ability to pay the debt and the spreads have widened a bit." Baillie Gifford has no exposure to the high yield sector: "We have no US corporate bonds and nothing in the high yield sector. The US corporate debt market is big and very developed the junk bond end is the most interesting end of it."
He is concerned, however, that there is too much supply, and one high-profile defaulter, particularly in the telecoms sector, could destroy investor confidence.
German government bonds constitute 3% of Allan's fund. "In Germany the yields are bit higher than in the UK and the euro remains seriously undervalued, so any appreciation in the euro against sterling would help returns." In Allan's view, the euro is 10-20% undervalued.
However, Japanese government bonds "are the lowest yielding long bond in the world," Allan says. "The Japanese government keeps spending at an alarming rate to get the economy to move so their debt is high relative to GDP which is not encouraging for long bond investors who want low, stable inflation." Arthur concurs and observes that Japanese interest rates could sneak up, as consumption has slowly started to rise.
Cash deposits are looking more attractive, as UK interest rates peak, claims Arthur. He is holding 5.3% of the fund in cash, marginally over his 5% benchmark. Allan, similarly, holds just over 6% cash versus a benchmark of 5.7%.
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