“A liquidity event is more likely in high yield than investment-grade bonds,” he said.
“Investment-grade bonds have become a shadow banking system. That is not going to reverse overnight, because investors who can still get 3-4% from their investment-grade bond fund are still going to hold it. The only time you can have a liquidity event in investment-grade is when cash rates go well above corporate bond yields, which is not likely to happen in the short term.”
However, in Doran’s opinion the wheels of the liquidity crisis are already in motion.
“A liquidity event is happening as we speak,” he warned. “If we look at how fast spreads have moved in the past month, in the summer the average triple-B gave you around 1.2% over gilts, and that is now around 1.65% – we have seen 45bps of widening in the past two months.”
From a broader standpoint, Dampier believes that people are being overly negative on bonds in general, going on to highlight Jupiter Strategic Bond and Royal London Sterling Extra Yield as two suitable mandates with which to head into the space.
“People have said that there has been a bond ‘bubble’,” he said. “But for there to be a ‘bubble’ there needs to be something to burst it, which would be valuations being out of synch. Valuations may look nuts against anyone’s history, but we have not seen a history of virtually zero inflation before and the world is knee-deep in debt.
“On a valuation basis you might prefer equity income, but bonds are not going to fall out of bed. They are only unattractive relative to history.”
