Société Générale Asset Management will sell the rest of the conventional bonds in its £500 million fixed-income portfolio, and buy index-linked paper. Paul Rayner, head of U.K. bonds in London, says, increased government and corporate issuance in general, especially on the long-end, will put pressure on yields. Rayner foresees inflation creeping up, which will prompt him to sell conventional gilts and buy index-linked gilts--both corporate and government. He expects to make the move next year. Currently, SGAM allocates 90% of its portfolio to government and index-linked bonds and the balance to corporate credit.
For the moment, Rayner may shorten the portfolio's duration by selling 30-year government gilts and buying 10-year governments if yields on 30-year paper go to 4.4%. He says the gilt market is very seasonally affected and toward year-end he expects there will be more liquidity on the back of a number of coupon payments and redemptions, which could cause 30-year yields to rise.
Rayner says the long-end of the government gilt curve will suffer next year from increased government and corporate borrowing, and he has already started to shorten duration by selling the very long-end of the gilt curve and the very short-end. He believes that 4% is the trough for base interest rates, which, coupled with a tightening bias--he sees rates being at 4.5% by the end of next year--will weigh on short-dated paper. Accordingly, he has sold all paper that is three-years or shorter in duration. Instead, Rayner has gone overweight the five- to 10-year portion of the gilt curve, because he says right now investors are being paid to buy the middle.
SGAM has been slowly re-deploying some additional assets to its corporate bond allocation. Based on the firm's more positive view on the U.S. and U.K. economies, Rayner says he has been buying some single-A and triple-B rated credits, mainly looking at the new issuance market. He says he will look for signs of further economic improvement and more good news from corporates in terms of earnings before buying in earnest next year.
