Fixed income fights back

Fixed income stocks were buoyed last month by the expectation of rate cuts but lack of liquidity and clarity over valuations remain a major concern said Fatima Luis, manager of the F&C Strategic Bond Fund.

Luis said October was a good month for fixed income with gilt, investment grade and high yield markets all posting positive returns.

"Fixed income stocks performed well in anticipation of interest rate cuts and speculation that this would help to stabilise money markets. The best returns were delivered by Gilts and BBB, due to their interest rate sensitivity.

"However, markets expected a bigger cut than the 25 basis points which the Fed announced at the end of the month and the tone of the announcement also sparked concerns over the potential build up of inflationary pressures, exacerbated by the rising price of oil and the continuing weakness in the US dollar," said Luis.

Luis said this had resulted in spreads widening out towards the end of the month, particularly in high yield following announcements from Merrill Lynch and Citigroup as to the extent of their exposure to the sub prime crisis which led to further falls in financial stocks.
Nevertheless, US data has been reasonably positive indicating a stable economy and further job creation but for UK investors, lack of liquidity in markets remains a problem.

"UK investors continue to be nervous about liquidity in markets. This is likely to remain a problem until greater clarity on the sub prime crisis emerges," said Luis. Another area of concern is that new issues have not been experiencing the same bounce as they did earlier in the year, which according to Luis may indicate a slackening in the demand for credit from investors. Activity in the funds managed by Luis has remained relatively muted over the month but there were some opportunities.

"New issuance in the high yield area has been modest with a number of issues in the US but the only scheduled issue in Europe was pulled due to current market conditions and a yield which failed to whet the appetite of investors. We have participated in a US gaming issue and have been using cash-flow to add to our investment grade positions," she concluded.