Giving his outlook for 2015, Jones, lead manager of the firm’s Strategic Bond Fund, highlighted the unprecedented premiums on sterling-denominated bonds as a result of the diminishing euro spreads.
He explained that the difference between the financial environment that preceded European QE and those prior to the UK and US programmes will lead to continental investors taking their search for returns elsewhere.
“When we had QE in the US and the UK it was done while they had major deficit,” he said. “However, in Europe it was done when there was effectively a current account surplus of €500bn, with everyone chasing the same assets that the ECB was trying to buy and therefore sending the euro into negative territory.
“If European investors have a shedload of money and they can’t get any return in Europe, they are going to come to the UK and US. So we will see a real demand from European investors for high-yielding assets, which means that we can still buy European investment-grades on attractive yields using the supply and demand dynamic.”
It is this ‘euroglut’ wave combined with a dearth of UK corporate bonds that Jones believes will allow sterling bond holders to reap the benefits.
“On the supply side, there are hardly any UK companies issuing bonds in the UK,” he said. “Why would they? It costs 150 basis points more to issue in a 10-year bond, just from the government yield, plus if you are UK company you can issue in euros, hedge it back to sterling and get paid another 50 basis points.
“On a seven-year bond there is effectively nothing to issue, which is why there is a lack of issuance in sterling and more in euros. This is positive for us on a pricing perspective, because the asset prices will continue to rise.”
