Woolnough: Why I am backing US T-bills over gilts

M&G Investments bond manager Richard Woolnough has revealed he is currently favouring US treasuries over gilts, as the latter are already priced for more quantitative easing.

Woolnough, running a range of funds at M&G including the behemoth £5.3bn Optimal Income fund, said he was opting for treasuries instead of gilts as another round of quantitative easing was already expected by markets in the UK, but not in the US.

"US debt is attractive versus gilts," he said. "In the UK, QE is priced in whereas it is not yet fully priced in in the US. Also, at some point if the UK economy continues to deteriorate, it will become bad for gilts, as there then becomes an element of credit risk."

The US meanwhile is presenting signs of solid and sustainable growth, according to the manager.

While he prefers treasuries, Woolnough said there are still opportunities in gilts.

He currently favours index-linked gilts after break-even rates fell to levels implying inflation of just 1.5% in the UK over the medium term.

"It is very cheap to add some inflation protection currently, with break even rates of 1.5%," he said.

However, M&G's bond team is concerned about the credibility of the Bank of England and its ability to target inflation in a rapidly changing world, with fears growing unemployment and growth may be its new targets.

Woolnough said although the Bank of England will never admit publicly such a change in mandate, index-linked gilts present investors with a better opportunity than conventional gilts given the current price.

He said: "Linkers are a better place to be now. Even if inflation does fall back to the normal target of 2%, you are still better off given break even rates of 1.5%."

Woolnough expects the Bank to be less concerned with high inflation, and more worried about the risk of deflation.

"Its apparent first duty is to keep inflation under control, but I actually think it is to have a working financial system," Woolnough said.

"If inflation is at 2%, then fine, but they (the MPC) will get scared about it falling below 2%."