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LGIM’s Hodges: negative yield talk is ‘expectation management’
by Emma Dunkley on Mar 07, 2013 at 10:52
Legal & General Investment Management’s bond fund manager Dickie Hodges believes talk of negative interest rates in the UK is about ‘expectations management,’ helping the Bank of England keep bond yields low and sterling weaker.
The L&G Dynamic Bond Trust manager said there have been negative yields in Asian economies in the past, as well as in Europe, which has supported fixed income assets.
However, the idea of negative interest rates in the UK is just ‘talk’ and will unlikely be implemented, he said. Interest rates have been stuck at historic lows of 0.5% for four years this week.
‘I am expecting interest rates will trade in a narrow range this year and perhaps next year too, and my fund is positioned accordingly,’ said Hodges (pictured). ‘Carry -or income- will be the main driver of returns this year.
‘I expect rates to start rising within two to three years, and am looking at bonds with a maturity of up to four years, giving the fund the opportunity to reinvest at higher yields and a decent yield in the meantime.’
However, with rates already at rock-bottom and after several rounds of quantitative easing, the Bank of England could be forced to pull other levers to try and kick-start the UK economy.
Ben Gill, global macro fund manager at the firm believes weakening sterling is a form of quantitative easing.
‘I don’t believe the Bank of England will take rates negative as this would tend to be problematic for banks, and if the BoE imposes negative rates for banks’ excess reserves I would expect this money to go into gilts,’ he said.
‘However, a lower currency for the UK would likely boost share prices of UK companies who generate a lot of their earnings abroad, and this is where I would expect to see money move.’
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