F&C Management, which manages E45 billion in fixed-income assets, 70% of which is allocated to government bonds is looking to take profits but will wait until long-dated gilts weaken slightly before doing so. Helen Roberts, who heads up government portfolios, says new issuance on the long-end of the gilt curve should cheapen them and push yields higher. As of last Monday, 30-year gilts were yielding 4.95%.
F&C is underweight long-dated and short-dated bonds. In the European and the U.K. bond markets, Roberts says there is some value in the near-term as global pessimism that interest rates will rise is overdone. She is also skeptical rates will go up in the U.S. and Europe, because economic recovery hopes are optimistic, although she concedes U.K. rates could inch up by 25 basis points by year-end. With that in mind, F&C is overweight in the 10-year area.
In general, F&C is bullish on inflation-linked bonds and has gone overweight versus nominal bonds. F&C is 3-5% overweight inflation linkers versus its benchmarks, the Merrill Lynch government bond index and FTSE government bond index. Roberts says recent regulation in France matching the savings rate to the interest rate, thus permitting savings banks to buy index-linked bonds as a hedge is a major positive for linkers.