Active Management key in current bond market says SWIP

The ongoing weak economy and the low interest rate environment in the UK provide a supportive backdrop for shorter-dated gilts according to SWIP.

However, with medium- term prospects in this market looking overvalued, SWIP's bond team believes more appealing opportunities exist across other bond sectors.

Graeme Caughey, Head of Government Bonds at SWIP comments: "SWIP sees two competing arguments at play in the gilt market - a near term positive and a longer-term more negative outlook based on our global economic view. In the very near- term, we see a positive impact from uncertainty as to the sustainability of any economic recovery and acknowledge that the Bank rate will not be rising anytime soon. As such, we expect to see some good returns from gilts in the near term. A little bit further out, as the economy starts to recover, we may start to look at higher gilt yields based on a combination of factors, be that an increase in the Bank rate, a removal of QE or inflationary pressures returning. For these reasons, we have gradually increased our corporate bond exposure across our gilt portfolios and have added to our weightings in index-linked gilts to seek some protection from future potential increases in inflation."

SWIP believes however that investors with diversified portfolios will want to retain a weighting in government bonds to provide them with stability, security and liquidity.

In the credit markets, SWIP believes corporate bonds are offering exciting opportunities for investors over the medium to long-term. The current yield spread, which represents the additional return from investing in corporate, rather than government debt, has been widening steadily since the summer of 2007 and by the first quarter of this year reached valuations which were extremely appealing on a medium to long- term view.

Neil Murray, Head of Corporate Bonds at SWIP comments: "We now have credit spreads at levels that we've not seen for 10 or 15 years, which provides an attractive entry point for investors. Currently, we believe there is excellent value in new corporate bond issues. Since the start of 2009 a steady flow of corporate bonds has come to the European credit market at what we believe are heavily discounted prices. Typically, these are non-cyclical with healthy cash flows and include familiar "blue-chip" names such as Siemens and Nokia."

SWIP remains cautious over the short-term at the prospects for credit during the remainder of 2009. While there is value in credit at these spread levels, there is a possibility that these spreads may widen further over the course of this year.

Neil Murray continues: "With the market pricing in a high probability of defaults, it is increasingly important to focus on stock selection to identify strong companies that will weather the current downturn. In the longer term, we believe current levels in credit markets look very attractive."