Bryn Jones, manager of the Rathbone Ethical Bond Fund, is continuing to see plenty of value in credit markets.
“Some of these bonds are now offering a significant pick-up in yield over Gilts,” says Bryn.
There is a strong likelihood that the Gilt market will show signs of a ‘bear flattening’ – when the market expects short rates to rise at some point, causing yields on short-dated bonds to rise and the long-end of the curve to flatten.
“The bear-flattening and the prospect of greater regulation for the banking sector are two key themes in the fund at the moment,” he adds.
“We are playing the prospect of higher rates through short-dated floating rate notes. On Sterling, we believe it might experience a short-term bounce, although this will be more of a technical move, as the pound has taken quite a bashing, and a rally now looks overdue. However, longer-term, fundamentals remain weak.
“Furthermore, this year will see the implementation of Basel II rules for banks – rules that govern their solvency capital requirements. These make it difficult for banks to use some, or certain parts, of Tier 1 core capital* for solvency purposes. The treatment of these bonds bears the highest resemblance to equities; however, the cost of their yield makes this debt expensive to service, meaning this capital is likely to be exchanged for bonds; tendered for cash, or called on the call date. We continue to exploit this theme.”
For further details please contact David Holloway, Head of Marketing at Rathbone Unit Trust Management (020 7399 0189).
The information contained in this note is for use by journalists and investment advisers and must not be circulated to private clients or to the general public. *The highest yielding, highest risk bonds in a bank’s capital structure.
Rathbone Unit Trust Management Limited is authorised and regulated by the Financial Services Authority and a member of the IMA. A member of the Rathbone Group. Registered office: 159 New Bond Street, London W1S 2UD. Registered in England No. 2376568.