Hermes Pension Management will shorten the duration of its £7 billion fixed-income portfolio once the U.K. economy begins to show signs of recovery, says Mike Carter, head of fixed income. Recently, the firm took profits in the five- to 10-year area of the gilt curve and reinvested in the 15-year plus end because long gilt yields have dropped in response to a less robust economic recovery. The portfolio's current duration is roughly nine years.
Carter believes long-dated gilt yields could drop as low as 4% over the next few months, because short-term interest rates will not rise for some time and money is going out of equities and into bonds. Carter foresees investors putting cash to work in high-yielding government bonds, thus buoying that end of the curve.
Although Hermes is not looking at putting new money to work in corporate bonds for the time being, Carter says the firm could buy quality single- and double-A credits if they widen out. "It doesn't take much bad news to knock the confidence out of the [corporate credit] market. There are some good quality credits out there that have sold off more than they should have," he says. Earlier in the summer, Hermes added utilities RWE and Eon's new sterling issues after the market had sold off. The portfolio allocates 40% to corporate credit and 60% to government bonds. The firm uses a variety of benchmark indicies.