Government-backed bank debt a new class of bonds

Despite billions of pounds of new government-backed bank bonds entering fixed income markets, Ian Spreadbury, portfolio manager of Fidelity International's Sterling Bond Fund, says he still backs corporate bonds to provide long-term investors with better value.

Government-backed bank bonds are a new phenomenon, based on the unprecedented Government bail outs of banks in September 2008. The first of these new issues came from Barclays in late October and this has since been followed by HBOS and RBS.

Fidelity's Sterling Bond Fund invests in both Government bonds and corporate bonds but Mr Spreadbury explains that he sees most value in the latter at present: "On the face of it government-backed bank debt is an attractive proposition - in very simple terms they are gilts with a slightly higher return. These new bonds sit right at the senior end of a bank's capital structure, which is the most protected part. However, most of these bonds have short maturities (under three years) and I feel there is more value at the longer dated, more junior lower tier two bonds where yields are around 3% higher but I still receive adequate levels of protection.

"Yields across the whole Sterling corporate bond market are around 9% at the moment and many prices are at historic lows - both are off their long-term average so investors who move into corporate bonds now will see an unusually high yield with the prospect of capital appreciation over the medium to longer term. On this basis I am happy to maintain an overweight in corporate bonds at the expense of gilts.

"Investors who want exposure to corporate bonds can find attractive opportunities if they choose carefully. For example our analysts recently found a bond issued by Aspire Defence, a PFI vehicle set up to rebuild and refurbish soldiers' living accommodation for the MOD, which yields nearly 9% but does not mature until 2040. Buyers of this bond therefore gain a good long term income with the prospect of recovering the purchase price early in the life of the bond. "Tesco plc has a bond yielding over 7% and trading down at 83 pence in the pound, which means it has the potential to offer capital appreciation of nearly 20%. The BBC has several attractive bonds whose income derives from its commercial properties."

Fidelity's Sterling Bond Fund is first quartile over six months, one year, three years and since launch in April 2005. It is one of the most flexible bond funds available and can allocate to corporate bonds, government bonds and high yield debt, according to prevailing market conditions. Mr Spreadbury manages the fund with a multi-strategy approach, where credit research, quantitative analysis and specialist traders all offer a range of complementary investment ideas.