M&G’s Richard Woolnough says investors should take advantage of the likely sell-off in bonds when interest rates rise.
‘It would be ideal for me if the Fed did a surprise rate rise because the market would panic horrendously and it would be a chance to buy risk at a low level,’ he said.
‘The day that rates go up could be the day to buy bonds.’
Although he does not expect either the US Federal Reserve or the Bank of England to raise rates over the next 12 months, he said that if he was in control of either, he would ‘probably put rates up’, saying it is a bullish statement on the economy.
Woolnough said that if the rate rise was reflected in the gilt market, pushing yields on 10-year paper from the current level of 3.04% to between 3.5% and 3.75%, the asset class would offer ‘good value’.
Across his funds, he has been steadily building credit risk, favouring BBB-rated corporate bonds. Despite spreads having narrowed over the past couple of years, Woolnough believes they can tighten further from the current level of 142bps and investors are ‘still getting paid to take risk’.
‘Assuming a 40% recovery rate, BBB bonds are pricing in around a 12-15% default rate over the five years,’ he said. ‘We are focused around BBB and last year we did very well having lots of credit risk and no duration risk.’
This year he has been upping duration across his funds, but said he is waiting for ‘one last sell-off’, possible caused by weak jobs data or economic growth fears before committing to this strongly.
Elsewhere, Woolnough said he is ‘comfortable’ with the size of his Sterling Strategic Corporate Bond and Sterling Corporate Bond funds, both of which have come down in size after M&G moved to stem inflows in 2012.
‘In 2012 we had the view that the Draghi put wouldn’t necessarily work and a lot of financials would go sub-investment grade. The bond market would have shrunk and we’d have been the fund of choice because of our positioning,’ he said.
‘That view wasn’t correct. The Draghi put came through and the universe didn’t shrink by as much as we thought. We are more relaxed about the eurozone now and the corporate bond markets continue to increase in size.
‘We are more relaxed about where we are- the funds are a bit smaller and the universe is a bit bigger.’