As long as the crisis in the Middle East and high oil prices persist, government bond markets will c...
As long as the crisis in the Middle East and high oil prices persist, government bond markets will continue to benefit from safe haven status.
However, the yield curve is reflecting the risks and the longer end is under some pressure. A soft landing remains likely and bond markets offer good value, so we are happy to maintain our fully weighted positions.
The exception is Japan, which we continue to be heavily underweight. The setback in the corporate bond market offers opportunity for selective investment, particularly in the UK, where the sector could benefit from the potential pension fund demand following the the Minimum Funding Requirement review.
We would avoid the telecoms sector, which will remain under threat of further downgrades and is facing potentially heavy issuance.
The US bond market has gained further ground over the past fortnight, helped by sharp falls in the equity markets. A temporary pullback in the price of oil, declines in equity prices and rising concern about the corporate bond market have made US Treasuries an obvious safe haven.
Corporate bond spreads, particularly on the telecoms issues, have once again come under pressure and government bonds have outperformed of late. This has been exacerbated by rumours of large book positions being liquidated.
Interest rates are expected to remain unchanged ahead of the US presidential election and the US Treasury market should be able to hold its own unless the price of oil reaches crisis levels.
The UK gilt market firmed slightly over the period, underpinned by uncertainty in the equity market and fears over corporate exposure. The tightening of corporate spreads has come to an abrupt halt as investors have reacted to earnings disappointment and fears that borrowers may struggle to service their debt, again, particularly in the telecoms sector.
The Debt Management Office's programme of reverse and outright auctions should ensure a continuation of the tight conditions in the gilt market, while any further widening of corporate spreads should see a resumption of demand from the pension funds and life assurance companies. The sterling bond markets are well underpinned at current levels and offer value to the investor.
European bonds have moved ahead over the past fortnight, in line with other bond markets. Government bonds outperformed corporates by a few basis points, reflecting similar concerns to the US and UK and the weight of new issuance
Indications of a slowdown in economic activity in Europe are being interpreted as only a temporary pause in growth. The eurozone economy is expected to grow further next year despite further monetary tightening.
Sofia Skaliftiri, Harvey Roland and Justin Hatch are on the Capel Cure Sharp bond team
Launched November 2018
£15m group claim
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