Mistakes made by central bankers have led to broken bond markets, according to Nick Gartside, the manager of the Schroder Strategic Bond fund.
He told the group’s investment conference last week that decisive action from both the government and the central banks was needed to reactify closed corporate bond markets and the wide London Interbank Offered Rate (Libor) spreads.
However, while he praised the actions taken by several governments, he said the central banks have been “out of touch” with what has happened.
“The mistake they made was the assumption we were going back to a 1970s environment, but we have gone back to the 1930s,” he said.
“As such the central bankers fell into an inflationary trap [by not understanding that inflation was coming from food and energy] and their mistake has led to the wholesale destruction of wealth.
“As such the central bankers have been shortsighted and missed the big picture.”
While Gartside expected Britain to soon enter a “vicious recessesion” four to five quarters of negative GDP growth in Britain, he said in this environment there is a “generational opportunity” to invest in corporate bonds because of their cheapness.
“The question is when to buy?” he said. “For two months no corporate bonds issued as the market has been shut.
“As a result of weak demand caused by the economic backdrop default rates will rise, getting close to 10% and this will widen corporate bond spreads. That will be the time to buy.”
However, now is not the time to be buying high yield bonds, he added, and on a historical basis he said there is very little value in government bonds as they are too expensive.
In terms of equity markets, Errol Francis, a specialist UK equity manager at Schroders, said investors should expect a similar stockmarket environment to the 1990s. That is, a market which swings one way and then the next.
Despite this and “awful investor sentiment” Francis said he is considering buying back into banks.
He said the solution to restoring confidence could be from the American housing market, where he added the first signs are emerging that the sector is stabilising.