Platt, manager of the £344m Royal London Corporate Bond Fund, suggests the bulk of the impact of the Federal Reserve’s quantitative easing policy has been at the short end of the yield curve, despite the Fed’s purchases being focused on long-dated bonds.
“Our view of QE is that it has very much affected short- and medium-dated bonds. The end of quantitative easing won’t have that much impact on the long end of the market in the US. We don’t like short-dated bonds in developed markets in general – medium and long-dated offerings are more attractive."
He adds that the US will show itself to be capable of dealing with its fiscal difficulties: “The US is a very flexible economy. It has shown that before and it will prove it again”, he says.
More broadly, Platt acknowledges that “the best returns we’ve seen from government bonds are over, and consequently the same is going to apply to credit”, but believes corporate credit continues to look good value in the context of other assets.
Credit
“Credit yields of 175bps over government bonds in the UK look very attractive,” says Platt, who also points to the diversity of UK corporate credit. “It’s also important to note the wide geographic spread of corporate bond issuers in the UK market. That has changed significantly over the past five or six years”.
Another aspect of that market undergoing significant changes is financial issuance. Platt sees volatility ahead for bank bonds, despite a belief that the regulatory outlook is skewed in favour of fixed income investors. “The regulator is working to the benefit of bondholders and the detriment of equity holders”, he says.
The rise of contingent capital structures, however, is a sign that bank bondholders are far from having things their own way, but Platt says appetite for such bonds has proved surprisingly weak.
“Pension funds and others still need to decide whether they treat these instruments as bonds or as equity. Cocos haven’t caught on as much as I thought they would.”
