City Financial Strategic Gilt fund manager Ian Williams has warned funds holding long-dated gilts and corporate bonds could face "sizeable" losses from mid-2010.
Williams, the Charteris Treasury Portfolio Managers CEO, says the UK faces major inflationary concerns beyond the middle of next year, as the full effects of the Bank of England's (BoE's) quantitative easing policy is felt.
The UK Government last week pledged an extra £50bn to its quantitative easing plan, which involves the BoE effectively printing money to buy Government and corporate bonds. It originally pledged £75bn but says it is on track to spend this by June.
Williams has positioned his Strategic Gilt portfolio on his strong inflation expectations, with the fund holding a large weighting in index-linked UK Government debt.
Williams' City Financial portfolio is second out of 27 funds in the IMA UK Gilts sector over one year to 20 April, up 13.7% against an average increase of 8.8%, according to Morningstar.
"As the inflationary consequences of QE kick in, the yield curve will spike and investors holding ultra longer-dated government bonds and longer-dated corporate bonds stand to lose sizeable money," he says.
"Corporate bonds are particularly vulnerable as there is little liquidity in the underlying assets."
Meanwhile, with the Government's Budget announcement of a record £220bn debt issuance this year, Williams says the initial spike in yields has adjusted the price level more in line with the this year's expected supply.
He believes the extra demand gilts this year could be met by the continued QE purchases, as well as possible take-up from banks and pension funds.
"The sub-prime disaster will lead to regulators telling banks to hold a much greater proportion of safer assets, such as gilts, and much less in possibly illiquid corporate bonds.
"This will significantly boost gilt demand over the next year or so, at the shorter end of the market.
"I can also see some form of regulatory pressure on the pension fund industry to buy more gilts on the grounds of safety too."
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