Bond fund managers are seeing value in five- and 10-year gilts on the back of a positive outlook for...
Bond fund managers are seeing value in five- and 10-year gilts on the back of a positive outlook for UK inflation and interest rates. The market is expecting inflation and interest rates to remain low and within this benign environment for fixed interest, sterling bonds are perceived as relatively cheap. Fund managers believe that UK interest rates are set to stay at around the 5% level for some time and that they could even go slightly lower.
Not everything is positive, particularly once the more negative sentiment coming out of the US is taken into account. The Federal Reserve's stated preference for tightening suggests that US rates could well be on an upward trend and the consensus forecast is for a rise of between 50 and 75 basis points sometime in the next 12 months.
Eddie Middleton, investment manager fixed interest at Britannia Asset Management, says the group is overweight five-year gilts as they have recently underperformed. Five-year gilts are yielding 5.33%. Britannia is underweight 30-year gilts which are yielding 4.77%.
Middleton says: "We are forecasting GDP growth of between 0.8% and 1% for the UK. We are not going to get the recession this year that was being talked about around six months ago. One of the main reasons the economy has improved has been the cuts in interest rates from the Bank of England Monetary Policy Committee.
"We would see 5% as being a trough in interest rates although we are not ruling out another quarter point cut if sterling remains strong. We also believe that inflation will be staying under 2% for the rest of the year. Inflation is not a problem for the market at the moment but sentiment in the market is not particularly good.
"The US markets believe that the Federal Reserve is set to raise rates in the US. If you look at the US, UK and European bond markets the correlations are high at the moment. It is difficult to see the UK and European bond markets making independent headway of the US. We tend to prefer the five-year sector of the market which has been underperforming and we are focusing on achieving yield."
Mark Parry, investment director fixed interest at Hill Samuel Asset Management, says the group is tending to favour long duration in UK gilts. He says the group is not concerned about UK inflation and Hill Samuel is forecasting that 10-year gilt yields will fall to around 4.25% by this time next year.
He adds: "The key point for us is that inflation will undershoot the Bank of England target of 2.5%. Inflation is not a problem, we have a positive stance on interest rates and the bond market.
"There is no reason why rates should not stay where they are for a while and then go down at some stage. Global bond markets have been affected by negative sentiment coming out of the US but the UK economy is accelerating, albeit from low levels and we are positive on the outlook for bond yields."
Peter Houghton, director, UK fixed interest at Clerical Medical, says the group is favouring 10-year UK bonds which are yielding around 5.25%.
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