Fixed interest fund managers are tending to favour bonds over government stock in the belief the exp...
Fixed interest fund managers are tending to favour bonds over government stock in the belief the expected pick up in global growth will not produce a beneficial environment for sovereign debt.
Paul Read, fixed income fund manager at Perpetual, is particularly favourable towards European high yield corporate bonds with growth in Europe expected to be strong in 2000.
He says: "From an international point of view we are not particularly keen on the government bond markets. We prefer US Treasuries and German bunds to gilts as 30 year gilt yields are significantly below those in US and Germany. The yield on a 30 year gilt is around 4.28% compared with 6.18% for a similar US Treasury and 5.7% for a 30 year bund. Even so, we are not particularly bullish on either Treasuries or bunds. There is a good chance of there being strong global growth next year and we cannot see government bonds rallying in this environment.
"In terms of our gilt holdings we have been trying to keep away from the long end of the curve where we feel there is a lot of risk. The market at this end of the yield curve is being driven by technical factors such as an imbalance between demand and supply fundamentals. If there was a correction here it could get quite nasty and we prefer the under 10 year area of the curve. What we really like is high yield and we are positive on the European high yield bond market."
For example, Read favours European corporate bond issues including debt from JazzTel, Spain's second longest telecom company, where he has bought a CCC-rated issue yielding around 14%.
Schroder Investment Management is less pessimistic on the prospects for the gilt market but is also fairly bullish on corporate debt in the belief demand from institutions is set to increase.
Bernard Abrahamsen, director, fixed income at Schroder Investment Management, says: "At the beginning of this year people expected a recession and gilt yields troughed.
"I think we have now gone quite a long way to discounting some of the increased growth that is expected.
"While there is not a lot of upside for gilts I do not think there is a great deal of downside either, depending on where interest rates peak. We believe interest rates will peak at around 6.25% or 6.5%.
"The big change I believe we are going to get is a narrowing of spreads between gilts and AAA-rated debt. AAA rated non-government bonds are currently yielding around 80 to 100 basis points over the underlying gilt. But a European Investment Bank bond should not be 80 basis points over gilts and we expect that will narrow. Over the longer term institutions will be aiming to raise their exposure to this area of the market.
"Demand for non-government debt will help to narrow the spread over gilts. I believe this will be led by the higher rated non-government bonds such as AAA rated stock and then shift down the yield curve towards AA and A rated bonds. I would not be surprised if spreads narrowed by 20 to 30 basis points over the next year."
Abrahamsen holds a 30 year issue from the European Investment Bank which is yielding around 5.05%.
He also holds 30 year debt from RFF, the French equivalent of Railtrack, which he adds is backed by an implicit government guarantee and is also yielding around 5.05%.
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