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AAA-rated Bowie: corporate bonds could fall up to 40%
by Emma Dunkley on Jun 25, 2012 at 11:07
Chris Bowie, head of credit at Ignis Asset Management, believes corporate bonds have limited upside and could see a capital loss of up to 40% if real gilt yields adjust.
Citywire AAA-rated Bowie, who manages the £256 million Corporate Bond fund, says even though corporate bonds are trading ‘very cheaply’ and may offer opportunities in the short-term, be prepared for a correction ahead.
‘Indeed the difference between the yield on corporate bonds and the yield on government bonds, the so-called ‘spread’, is cheaper now than at any point pre the financial crisis of 2008,’ said Bowie.
Companies are also rewarding investors for taking the additional risk of holding longer-dated bonds.
Sterling investors in US-firm Citigroup, for example, see a yield difference of 290 basis points between a three-year bond and a 26-year bond, a level of steepness that is an incentive to take risk.
‘But is it worth it?’ asked Bowie. ‘In our view, no, not at this stage.’
Bowie said the timing on this trade is running out and that when yields on government bonds are below the level of inflation, they are not sustainable, as history has shown.
‘Ultimately I firmly believe that real yields on gilts will adjust back up towards +2.5%,’ said Bowie. ‘When this adjustment takes place, fixed income returns will be hit hard. As a rule of thumb, credit loses 8% of its capital for every 1% move higher in gilt yields.
‘So, in short, this adjustment will be very painful for credit investors. This leaves the obvious question: when will it happen?’
For the moment, Bowie believes slower inflation is still on the cards. ‘Wage inflation is not a problem in the UK, and consumer prices have retreated from the levels seen in the recent past.’
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