M&G head of retail fixed income Jim Leaviss believes government bonds still offer value despite the yield on the 10-year gilt approaching historic lows last week.
Continued concerns for the global economy drove the yield on the benchmark UK government bond below 3% for the first time since March 2009 on Thursday.
It was trading at 2.97% on Friday, just four basis points higher than this century’s low of 2.93%.
Leaviss says government bonds could continue to show strength as the global economy faces a “significant chance” of slipping back into recession.
“As a team we have consistently been saying it is going to be low growth for a longer period of time. We remain of the view that central banks are not going to be able to put interest rates up for the foreseeable future, it is a very weak economy,” Leaviss says.
“Chances of slipping back into recession are significant, probably not 50%, but certainly a significant chance we have another leg down of the global economy.
“It means government bonds look pretty good value still. If we go back into deflation, 10-year yields of 3% perhaps look too high.
“But we are aware of risks to this view; we need to keep an eye on food price inflation and the eventual impact of QE. We are still long duration, but not as much as we were a month ago.”
On quantitative easing, Leaviss says the UK may need to provide additional stimulus to fight the deflationary pressures.
“We recently saw the US move on the signs of weakness, while the European central bank has also allegedly been buying a few more government bonds,” he adds.
“I imagine there might come a time when the UK needs to turn the presses back; especially considering core inflation was weaker than most people anticipated.”
UK 10-year gilt yield
