Bank of England governor Mark Carney's inflation report has meant we will be living - and investing - in a low-interest rate environment for some time yet.
While we know this is good news for borrowers and home owners, what does it mean for bond investors?
Ignis' Head of Credit Chris Bowie explains how fixed income will be effected and what other challenges lie ahead for bond investors.
Emma Wall: Hello and welcome Morningstar TV. I'm Emma Wall and you are watching ‘Why should I invest with you?’ Here with me today is, Chris Bowie, Head of Credit at Ignis.
Chris Bowie: Good morning, Emma.
Wall: Hi, Chris. So, you are known amongst your peers for talking down your asset class, why are you bearish on some types of bonds?
Bowie: Well, I've got a less than constructive view over the medium term on bonds. What worries me is that real yields are still negative and I think investors should be compensated for using their capital by receiving a positive real return. So, I think over the medium-term bond yield should rise, so that tenure yields become positive from a real sense and that would imply a sell-off of somewhere between 0.5% and 1% to at least where we are today.
Wall: Looking at recent news, Mark Carney's inflation report last week puts pressure on the market to keep interest rates down. What impact does that have on the asset class?
Bowie: I think it's good. I mean there's been a lot of commentary about his tying interest rate policy perhaps to unemployment. I actually think moving towards that Federal Reserve twin objective as an output and inflation is a good thing for the U.K. economy. What we – the risk we have in the U.K. is that we are at structurally higher inflation economy than say the U.S. So, you'll need to keep a tighter rein on rates, should inflation start to appear. But I think showing the market that output is very important to the U.K., employment and growth are the key things as well as inflation, I think is actually a positive step.
Wall: Bonds offer investors as much breadth as equities. There are some good, there are some bad. Where do you see value?
Bowie: Where we see value, are in, really the most secure form of bonds which are backed by assets. So, a lot of these types of bonds got a bad name through the crisis because they were speculative, but that are very high quality asset-backed bonds, such as those issued by Tesco for example, where you have the security of the company, but also if the company gets into trouble, you physically own their supermarket properties. So we like asset-backed bonds from, say, supermarkets, from utilities, from some of the telco companies like BT, for example.
Wall: What sort of yields are they yielding?
Bowie: Between 4% and 5%. So, not a fantastic yield, but a decent yield for good quality. They are not speculative and they will give you a positive real return.
Wall: And better than inflation.
Bowie: Better than inflation, exactly.
Wall: Chris, thank you very much.
Bowie: Thank you.
Wall: This is Emma Wall, for Morningstar TV. Thank you for watching.
