Bond investors should not fear the beleaguered banking sector, with the pressures surrounding these fragile financials more of a concern for equity holders, Invesco Perpetual's Paul Causer says.
Causer – Invesco’s fixed income co-head – believes while bank share prices have taken a tumble recently, financial credit offers “compelling value” in current conditions.
Invesco Perpetual has reshaped its Monthly Income Plus fund to cash in on these opportunities, moving away from its relatively defensive stance. The fund’s exposure in bank credit stands at 21.2%, from just 7.5% in May last year.
Causer says March's Bear Stearns rescue was a turning point, with credit markets recording the strongest monthly return for over five years in April.
“The worst of the deleveraging appears to be over. Leveraged funds such as SIVs and conduits have either been restructured or brought onto sponsoring banks’ balance sheets,” he says.
“Whilst the share prices of banks of whose bonds we have bought have suffered double digit percentage price declines, the bond prices have held up much better with many currently above par, despite a sharp sell off in government bonds.”
With spreads at an all-time wide, Causer has looked to new issues with “attractive” coupons. The fund has bought HBOS with at a 9.54% coupon, Barclays at 8.25%, Citigroup ($) at 8.4% and Alliance & Leicester at 9.625%.
“Banks lie at the heart of the credit crunch. Banks’ access to wholesale funding has diminished and many have been forced to make significant write-downs from exposures to structured credit and mortgage related assets,” Causer says.
“This means an extended period of deleveraging is likely as is slower loan growth in a period of weaker economic activity and an increasing reliance on deposit growth for funding.
“Whilst it is important to recognise these risks, we believe that bank credit spreads now offer compelling value for investors.”IFAonline
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