Invesco Asset Management is adding to its U.K. gilt positions when the bonds experience temporary weakness, in particular, on days the equity market is up. "There has been a very strong correlation between equity markets and bond yields. We're looking to buy on dips in the bond market. With bond yields at 4.75% in the U.K., gilts look to be relatively good value. Any kind of uptick in equities is a potential buying opportunity to increase exposure to gilts," says Andrew Farrell, fund manager of $2 billion in mainly U.K. government bonds.
Farrell is buying in the five- to 10-year area where there is a relatively steep yield curve. He will keep adding to gilts, because he sees U.K. inflation dropping, which could lead the Bank of England to cut interest rates. "What we've been seeing has been going on for year--a continual trend. It seems to be the most attractive position," he says.
Over the next six months, Farrell will consider adding to the firm's corporate bond allocation. Invesco buys investment-grade names rated single-A or better. For the past few months, the firm has been scaling back its corporate allocation, because those bonds were deemed too risky. However, going forward, Farrell says yield spreads over governments are attractive, and the firm will seek to increase its corporate exposure. "Data has not been that strong in terms of the economy, but equity has done relatively well. The risk is that consumer is reining spending--some of this is priced into the market. If you can see through all this, spreads are attractive, but there is still some widening to come," he says. Farrell declined to say what would trigger the move.
