Corporates have had a good run, credit spreads have rarely been tighter, but it doesn’t take much to turn this picture around, says Mike Riddell.
The lead portfolio manager for Fidelity’s Strategic Bond Strategies said spreads, which are particularly tight in the US, are justified to an extent, as the US economy has grown at 3 per cent for a number of years and corporates are healthy.
But this economic picture is unlikely to go on forever, and besides, the illiquidity of corporate bonds does not seem to have been priced in in the way people might expect, he added.
“All it takes really is just a little bit of a dent in this narrative of the US can grow at 3 per cent forever and I think you might see a repricing both of where interest rates are going but also the perceived risk of corporates,” he said.
Riddell said the reason corporate yields are high right now is that the government bond yield – the risk free rate – is high too.
He said a big widening of spreads, which would harm capital gains, would only happen in a recession or crisis environment but even if growth slowed and credit spreads widened a bit, investors were better off owning government bonds.
“The question people always need to ask is are you getting paid enough to move down the credit risk spectrum from your save haven government bonds . . . into lower rate investment grade or high yield, and I’d argue no you’re not.”
He said there was a lot of value in government bonds at the moment because there were not a lot of rate cuts priced in.
“The market is saying interest rates will go down to maybe 4 or just below 4 [per cent] and never go lower than that ever again. And I think there’s a pretty good chance that if we see another wobble in growth . . . that narrative can completely change.”
To hear more about Riddell’s outlook on the bonds market and the opportunities he is chasing right now, click on the video link above.
carmen.reichman@ft.com