Spreadbury has taken the duration of the £3.2bn Fidelity MoneyBuilder Income Fund to around 7.7 years while the £1.2bn Fidelity Strategic Bond Fund’s has been reduced to 5.5 years.
Data from Bloomberg showed ten-year gilts as yielding little over 1.87%. The yield on gilts has fallen steadily as investors have fled to perceived safe havens such as UK government bonds.
“I’m a bit concerned with gilt yields at these levels – historically the lowest ever,” Spreadbury said. “With yields at these low levels, I’m concerned we’re not being properly compensated for the tail risks.”
The manager warned that another credit crunch or a return to recession have not yet fully receded. If either of these were to occur, the credit quality of the UK government would come further pressure and this could harm gilts.
On the other hand, he noted that aggressive monetary policy such as greater use of quantitative easing to prevent the economy from entering recession would increase the risk of inflation moving away from the target rate – which would also be bad for gilts.
“I don’t think these risks are factored in at these levels and yields are a little bit expensive. As a result I’ve been running duration in the portfolios sat slightly lower levels,” the manager explained.
Spreadbury added that he sees value remaining in investment-grade corporate bonds, citing Tesco, Imperial Tobacco, British Telecom and regulated utilities as good-quality companies with yields “substantially” over government bonds.
