L&G’s Canoy: Rating cut would not cost UK safe haven status
Star fixed income manager plays down impact on government bonds of any UK credit rating cut.
A cut in the UK’s credit rating will not trigger a sell off in government bond markets, according to Legal & General Investments’ Michel Canoy.
Mr Canoy, manager of the £1.3bn L&G Fixed Interest fund and the £387m Managed Monthly Income fund, said the UK was “likely” to lose its AAA credit rating, but claimed it would maintain its status as one of the highest-rated government bond providers in Europe.
The manager dismissed the likelihood of a sudden increase in UK government bond yields, saying neither a “miracle recovery” in the developed world nor a “total loss of confidence” in the UK were likely to materialise.
The US saw its credit rating cut from AAA to AA+ by Standard & Poor’s at the beginning of August last year, triggering a giant equity market slump. However, US treasury yields, which fall as prices rise, have fallen since the downgrade. Benchmark 10-year yields on the bonds have declined by 96 basis points to 1.66 per cent as of August 13.
In the same 12-month period, UK gilts have fallen from 2.77 per cent to 1.59 per cent.
“[A miracle recovery] relies upon a sudden solution to the eurozone debt crisis,” Mr Canoy said. “I cannot see this as a credible outcome in the short or even medium term. It could take 20 or 30 years for this to play out – just look at Japan.
“Gilt [UK government bond] yields would also rise if there was a total loss of confidence in the UK economy, which would have a knock-on effect on sterling. That’s when the Bank of England would probably snap and have the presses running day and night to print enough money for a tax cut, with the government forgetting all about austerity. That seems incredibly unlikely right now.”
The manager also predicted a rise in corporate defaults, resulting in a volatile period for high yield debt. He said that although stronger companies could be found, fund managers should not be chasing high yields above all other considerations.
Mr Canoy’s comments follow weeks of bad news and bearish outlooks emanating from the fixed income world.
Last month fixed income managers including Ignis Asset Management’s Chris Bowie and Kames Capital’s Phil Milburn warned the corporate bond market would be vulnerable to a selloff if the UK’s credit rating was cut, as corporate bonds are often priced in relation to government bonds.