PIMCO’s sterling portfolio head Mike Amey believes the 30-year bull market in UK gilts is dead and has shifted his focus towards emerging market currencies.
Amey said gilt yields have been kept artificially stable on the back of the BoE and commercial banks being “forced buyers”, with banks owning 30% of the market.
The manager, who heads up the PIMCO Select UK fund, added in an environment of rising inflation, coinciding with record low interest rates, gilts are depressed and will produce a zero real return.
“The BoE and the government have seemed to accept that growth is going to be low, and this is why they are keeping interest rates at 0.5%. They are tolerating the high levels of inflation as the price they have to pay for the low growth environment,” said Amey.
“With the BoE likely to keep real short rates negative, the 30-year government bond rally is over as this does not offer investors inflation protection.
“The only reason GILT yields have remained stable is because the banks were forced buyers after the credit crunch, with the BoE purchasing £200bn and the commercial banks £95bn.”
Amey said he is tapping into safe spreads away from government bonds and has been boosting exposure to EM currencies.
“I believe EM currency exposure offers a better secular opportunity to generate inflation protection over gilts.”
He recently introduced a Brazilian local currency bond into the portfolio, which is currently yielding 12.3%. He is also bullish on the growth prospects for out-of-favour asset-backed securities.
“Asset-backed securities are attractively valued. I have a position in Tesco and Merryhill Shopping Centre.”
Sales head departs after eight years
Near-term volatility expected
Fund to offer diversification benefits
Staff blog addresses growing concerns
Market declines just a 'knee-jerk reaction'