Chris Lynas, the manager of the Smith & Williamson (S&W) Fixed Interest Trust, is not tempted to take advantage of wide corporate bond spreads. This is because he says the risk of companies defaulting on payments still remains.
Instead, the manager is sticking to holding a larger exposure to gilts even though he admits the prices are not as attractive.
He adds: “The base rate is currently 2% and the consensus view is that there will be another 0.5% cut in January but we think it will actually go below 1%. I also think we are also going to see negative inflation next year. So should a triple-A rated 20-year Government bond be yielding more than 4%? I do not think so. There is still a lot of fun to be had with British Government bonds”
The Fixed Interest fund has 55% in gilts and 45% in corporate bonds. Although he compares corporate bond spreads to those in 1931, during the Great Depression, he is not tempted to increase this exposure yet.
He says: “Corporate bonds are the cheapest they have been in three-quarters of a century but we think the macroeconomic environment will continue to deteriorate and there will be more casualties. It is difficult to see spreads go down all that quickly and when we have had our fun with government bonds we will increase the weighting into investment grade corporate bonds at some point in 2009.”
Ian Kenny, Lynas’ co-manger on the fund, adds: “The fund is currently very liquid as we can sell Government bonds at any time and that is a nice place to be.”