Artemis’ Snowden: Bond Market Surpasses ‘Fear Peak’ – FE Trustnet

The bond market in the UK has already bottomed out, with all interest rate hikes from this tightening cycle already more than priced in, according to Stephen Snowden, fund manager of Artemis Corporate Bond.

In a recent Trustnet article, Murray International’s Bruce Stout said equity markets have yet to hit the “peak of fear” as we haven’t seen a forced sell-off.

However, Snowden claimed it was a different story in the UK fixed income market, where the FTSE Actuaries UK Conventional Gilts All Stocks Index is already up 14.3% since the panic peaked over former Chancellor Kwasi Kwarteng’s disastrous mini-budget.

Index performance in 2022

Source: FE Analytics

Asked if he thinks UK fixed income in general has already passed the ‘fear peak’, he replied: ‘Yes, that would be the easy answer. The spike in good market that was generated by the considerable economic and political uncertainty we found ourselves in six weeks ago has clearly passed, and markets are much more reassured by Rishi Sunak and Jeremy Hunt.

“But personally, I don’t believe the base rate hikes that the market has predicted will materialize.”

The main reason Snowden said bond yields are excessive is due to the inability of homeowners in the UK to cope with higher rates. While only 20% of mortgage holders are currently variable rate, an additional 30% have fixed rate contracts that will end before the start of 2024.

Data from Moneyfacts showed that the average five-year mortgage rate has fallen from 2.3% to just under 6% over the past year.

“Any time you’re in a highly indebted society, either personally or at a government level, the economy is much more sensitive to interest rates, and that’s why we think we’ll see a significant impact on the economic growth and consumer confidence long before it hits the peak of what was rated,” Snowden added.

He also predicted that inflation would drop significantly over the next year. As the CPI recently hit 11.1% for the first time since 1981, the Office for Budget Responsibility said the UK could enter a period of deflation by 2024.

Snowden was skeptical the decline would be so extreme, but said it would be prudent to lock yields at their current levels, especially for corporate bonds where they are particularly high.

“Inflation is now 11%, but I think it will drop to around 3% in a few years and we [corporate bond yields of] 6%. While they won’t compensate for inflation over the next 12 months, they should compensate you generously for years beyond that,” he said.

“The average life of a UK corporate bond is nine and a half years, so if you buy now you have nine years of this very high income which, on average, will significantly exceed what inflation produces. “

Snowden admitted there were still risks in corporate bonds, but said he couldn’t think of a better alternative to beat inflation on a risk-adjusted basis. The manager admitted they could underperform equities when the market turns, but pointed out that corporate bond yields are considerably higher than dividends, which is another tailwind for the asset class. .

“When yields were high in previous decades, people bought bonds, but we’re seeing fewer companies issuing them,” he continued.

“Any time your dividend yield is significantly higher than your corporate bond yield, it makes sense to issue bonds, buy back stock or pay dividends because your cost of funding is cheap, but now the reverse is true.

“I’m not saying companies will stop buying back shares, paying dividends or investing in factory equipment, but the hurdle rate is now significantly higher.”

He added: “As a result, we have more demand for corporate bonds and less supply, and that’s a very healthy backdrop for mid to long-term returns.”

One might expect corporate bond managers such as Snowden to talk about the outlook for their asset class, but others with no vested interest are just as optimistic.

Guy Monson, Chief Market Strategist at Sarasin & Partners, said: “We are seeing an increase in the value of investment grade UK corporate bonds, particularly from issuers in less cyclical or global sectors. Yes, we do expect a recession in the UK, but we think it will be moderate, especially with capped energy prices, strong employment and strong economies.

The bond market in the UK has already bottomed out, with all interest rate hikes from this tightening cycle already more than priced in, according to Stephen Snowden, fund manager of Artemis Corporate Bond.

In a recent Trustnet article, Murray International’s Bruce Stout said equity markets have yet to hit the “peak of fear” as we haven’t seen a forced sell-off.

However, Snowden claimed it was a different story in the UK fixed income market, where the FTSE Actuaries UK Conventional Gilts All Stocks Index is already up 14.3% since the panic peaked over former Chancellor Kwasi Kwarteng’s disastrous mini-budget.

Index performance in 2022

Source: FE Analytics

Asked if he thinks UK fixed income in general has already passed the ‘fear peak’, he replied: ‘Yes, that would be the easy answer. The spike in good market that was generated by the considerable economic and political uncertainty we found ourselves in six weeks ago has clearly passed, and markets are much more reassured by Rishi Sunak and Jeremy Hunt.

“But personally, I don’t believe the base rate hikes that the market has predicted will materialize.”

The main reason Snowden said bond yields are excessive is due to the inability of homeowners in the UK to cope with higher rates. While only 20% of mortgage holders are currently variable rate, an additional 30% have fixed rate contracts that will end before the start of 2024.

Data from Moneyfacts showed that the average five-year mortgage rate has fallen from 2.3% to just under 6% over the past year.

“Any time you’re in a highly indebted society, either personally or at a government level, the economy is much more sensitive to interest rates, and that’s why we think we’ll see a significant impact on the economic growth and consumer confidence long before it hits the peak of what was rated,” Snowden added.

He also predicted that inflation would drop significantly over the next year. As the CPI recently hit 11.1% for the first time since 1981, the Office for Budget Responsibility said the UK could enter a period of deflation by 2024.

Snowden was skeptical the decline would be so extreme, but said it would be prudent to lock yields at their current levels, especially for corporate bonds where they are particularly high.

“Inflation is now 11%, but I think it will drop to around 3% in a few years and we [corporate bond yields of] 6%. While they won’t compensate for inflation over the next 12 months, they should compensate you generously for years beyond that,” he said.

“The average life of a UK corporate bond is nine and a half years, so if you buy now you have nine years of this very high income which, on average, will significantly exceed what inflation produces. “

Snowden admitted there were still risks in corporate bonds, but said he couldn’t think of a better alternative to beat inflation on a risk-adjusted basis. The manager admitted they could underperform equities when the market turns, but pointed out that corporate bond yields are considerably higher than dividends, which is another tailwind for the asset class. .

“When yields were high in previous decades, people bought bonds, but we’re seeing fewer companies issuing them,” he continued.

“Any time your dividend yield is significantly higher than your corporate bond yield, it makes sense to issue bonds, buy back stock or pay dividends because your cost of funding is cheap, but now the reverse is true.

“I’m not saying companies will stop buying back shares, paying dividends or investing in factory equipment, but the hurdle rate is now significantly higher.”

He added: “As a result, we have more demand for corporate bonds and less supply, and that’s a very healthy backdrop for mid to long-term returns.”

One might expect corporate bond managers such as Snowden to talk about the outlook for their asset class, but others with no vested interest are just as optimistic.

Guy Monson, Chief Market Strategist at Sarasin & Partners, said: “We are seeing an increase in the value of investment grade UK corporate bonds, particularly from issuers in less cyclical or global sectors. Yes, we do expect a recession in the UK, but we think it will be moderate, especially with capped energy prices, strong employment and strong economies.