Fixed income investors have grown too comfortable with the world of loose monetary policy and easy money, and may soon find themselves facing significant headwinds, Kames Capital’s Iain Buckle has warned.
Buckle, co-manager of the £669m Kames Sterling Corporate Bond fund, said there had been increasing signs that the recent rally in credit markets was now running out of steam.
As such, he said now was a good time to re-evaluate portfolios and take profits from positions, with risks from Brexit and the potential for aggressive monetary policy being underestimated by many investors.
“Investors have been very sanguine about the potential for further rate hikes from the Fed, and credit markets, like most risk markets, have been weaned on a diet of easy money,” Buckle said.
“The current unwillingness of the US Federal Reserve to tighten policy at anything other than a snail’s pace, coupled with the recent extension of quantitative easing from the European Central Bank (ECB), has been something of a ‘Goldilocks’ scenario over the last eight weeks for credit markets. Any threat to this would, at least likely, create more volatility.”
The manager added while support from the authorities was unlikely to be withdrawn in the immediate future, it was hard to get excited about valuations for corporate credit at current levels after the recent rally.
“For significant chunks of the corporate bond market, credit spreads are tighter than where they began the year, albeit still being wider than they were 12 months ago,” he said.
“I’m therefore struggling to get too optimistic, especially as there are plenty of bumps in the road. Indeed, now seems as good a time as any to take a little profit on the recent gains in credit markets.”