Strategic bond fund managers Richard Hodges from LGIM and Fidelity's Ian Spreadbury both expect UK government bond yields to remain at their abnormally low levels for the foreseeable future.
Hodges (pictured), who heads up the £1.6bn L&G Dynamic Bond trust, thinks gilt yields will remain at historic lows, even if the UK's coveted triple-A credit rating is downgraded in the first quarter of next year.
Last month UK government bonds touched a record low of 1.407%, with the asset class seen by many investors as the ‘ultimate safe haven trade' to shield assets against the unresolved European sovereign debt crisis.
The 10-year benchmark gilt yield ended trading yesterday at 1.5% and Hodges expects gilt yields to remain at these subdued low levels for at least another year.
"Everyone has been writing off gilt yields, saying they are an asymmetric bet and will inevitably go higher. This is an argument I agree with but I cannot see them going higher for another year at least," said Hodges.
He added over the longer term yields will return to more normalised levels of 3%-3.5%, but only when risk appetite returns to global markets.
"I think even if the UK is downgraded one notch to AA+ early next year gilts will not shoot up higher. There will of course be an initial negative reaction but then investors will step back and face the dawning realisation that other countries have much greater refinancing pressures than the UK.
"The vast majority of the UK government bond market's maturity is in excess of 15 years, so if a company needs to refinance their debt there is no near term threat, unlike in 2008 when they would have defaulted."
Spreadbury, who heads up the £1.1bn Fidelity Strategic Bond fund, holds a similar view and anticipates gilt yields will remain stubbornly low until capital markets become less volatile.
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