High yield credit set to benefit from long-term low rate backdrop

Yesterday's news that the Bank of England is in no hurry to raise interest rates was fully anticipated by the market, with some experts commenting that low rates may become commonplace to counterbalance the Government's ambitious planned spending cuts.

This comes as no surprise to Fatima Luis and Rebecca Seabrook, co-managers of the F&C Strategic Bond Fund, who have been adding to higher quality high-yield credit positions to the Fund based on the belief that interest rates and inflation will remain low for some time yet.

In a Fund update issued by the fund managers last week, Luis and Seabrook are particularly positive on BB and some B issues as these have priced in the risks from the sovereign debt crisis and offer attractive opportunities. They have added US hospitals group Vanguard, Mexican telecoms group Axtel and South African gaming group Cirsa.

"Another key strategic theme is financials, where we remain overweight despite a bumpy second quarter. We continue to believe there is long-term value to be found, whilst credit spreads still have some way to go before returning to their longer-term norms," Seabrook commented.

Elsewhere in the Fund, Luis and Seabrook were among the first to see value in asset backed securities, which have delivered some 9% year to date, benefiting from the flight to quality during this particular period.

Seabrook expects volatility to continue as growth in both the UK and Europe comes under pressure as austerity measures start to bite, adding: "Austerity measures being imposed by the Government will hamper economic growth and GDP is likely to remain below trend for the foreseeable future. However, whilst interest rates remain at historic lows across so many markets, investors will continue to search for yield and I expect 2010/2011 to be favourable for high-yield credit. Name selection will however be crucial in delivering positive returns."