(Bloomberg) -- The pound sank to an all-time low, yields on government and corporate bonds jumped. But even as chaos engulfs sterling assets, some UK credit market watchers say they’re waiting for the right moment to come back into the market. When? That’s the big question.
Here’s what they had to say:
David Zahn, head of European fixed income at Franklin Templeton:
“We continue to be positioned short duration because we think that this still probably has further to go and the central banks will have to do more. It does feel like we’re getting very much into some type of capitulation phase where there are very big moves, so we have been looking at whether or not to buy some rates. We have not done that yet, but that’s kind of our next thought process. We have also been looking at the new issue market for credit: We think that there are opportunities there because new issue concessions are quite high. Credit is quite wide and we think it’s pricing in a coming recession. I mean, the UK is probably already in a recession and Europe will probably be in a recession in the next two quarters. In those environments, we want to add to high quality corporates that will ride through this quite easily. And then probably also start thinking about when to buy duration, but we are not there yet.”
Zachary Swabe, a portfolio manager at UBS Asset Management:
“Yields are rising to attractive absolute levels, but then so are gilts. Still, unless we see a dramatic worsening of the economy, there may be some opportunities presenting themselves in the fourth quarter for double digit-yielding investments in multiple parts of the sterling credit market like the BB-rated cohort, which has very limited default risk, or sterling financial credit such as CoCo bonds.”
David Page, head of macro research at AXA Investment Managers:
“I’d expect to hear something from the BOE. We were surprised last Thursday when the MPC minutes didn’t make any mention of sterling other than recording the decline in GBP. It’s far from an ideal time (for the UK DMO) to be issuing, especially through a syndication. One might fear that the government will not get the best price for its gilts issuing in this environment. But equally, the political optics of the DMO having to cancel a syndication on back of the Chancellor’s announcement don’t look good either. So we assume the DMO progresses.”
Gordon Shannon, a portfolio manager at TwentyFour AM:
“There’s a lot of value in UK credit, it just needs to be accessed selectively. We’re focused on UK companies with high proportions of overseas revenues and non-cyclical earnings - particularly short dated bonds. I prefer being immunized from bad news than trying to predict it but that doesn’t mean we need to entirely avoid the UK. I don’t foresee an improvement in volatility until policy makers better learn to communicate with the markets. I think they lost the discipline over the QE era but bond vigilantes are back now and they need to re-up their game.”
Jamie Irvine, a London-based investment manager at abrdn plc:
“UK credit spreads have been relatively subdued versus gilts and FX markets seeing most of the action. With this volatility in government bonds coinciding with Bank of England commencing sales of their corporate bond portfolio, it sets up quite a negative technical for UK credit markets in the short term. However, looking through the short-term price action, all-in yield for investment grade credit is now quite elevated. If the volatility in rates markets were to subside this would present some relatively attractive all-in yields for UK fixed income assets. For the time being we are happy to remain long of cash, short of UK duration and broadly flat in terms of credit risk.”
Paola Binns, head of sterling credit at Royal London Asset Management:
“We will see more volatility I suspect, so no great confidence to do much. The key will be how the gilt auctions go this week, if there is no demand we could see another leg down. The key part of the equation the government is not taking into account is: who will pay for all their largess.”
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