The Smith & Williamson fixed income manager said the potential path of UK interest rates had been “under scrutiny” for the past 18 months. This was because of the forward guidance policy of new Bank of England governor Mark Carney and the signposted removal of stimulus in the US.
Mr Lynas said the yield curve had been steeper because it had started to reflect the market’s view that a rise would be necessary.
“Our strong view has been, and is, that the panic on UK rates, which began in May 2013, is overdone,” he said.
“The obvious parallel in recent times was early 2011 when the view in the press, and among financial commentators, was that rates would rise by 200 basis points during the year with 0.5 per cent increases on each of the Bank of England quarterly inflation report months.
“In reality, none took place and bonds recovered as the yield curve flattened.
“Our suspicion is that the siren calls for rate rises are being drowned out by economic realities of very low inflation and wage settlements. There may be no UK rate increases either in 2014 or 2015.”
Markets have obsessed over when rates will rise, partly due to the forward guidance policy introduced by Mr Carney. The governor originally aligned the unemployment rate with rising rates but later abandoned this metric after the unemployment level dropped quickly.
Mr Lynas, co-manager on the group’s Fixed Interest and Short Dated Corporate Bond funds, said there were also several dangers to global growth – including reduced GDP growth in China and fears about deflation in Europe – which would mean the UK may keep rates at record lows for longer.
“In the case of China we think there is an inflated bubble in the offshore banking system,” he said.
“Indicators show there is roughly $7trn (£4.3trn) of hypothetical money in this area, according to Merrill Lynch.
“In some cases, this is backed by physical metals sitting in warehouses, which may have been pledged many times over. When this bubble bursts it may send a deflationary tsunami around the world.”
The manager also said the low levels of inflation on the Continent would maintain an environment where it was unnecessary to raise interest rates in the UK.
“The eurozone inflation rate at 0.3 per cent is within measurement error of turning negative – ie, deflation,” he said.
“With so many trade links with the UK, we think this would prevent UK rates rising for a considerable period.”
In the £28.5m Fixed Interest Trust, which Mr Lynas runs with manager John Anderson, there is just 1.1 per cent exposure to bonds rated ‘AAA or government’, with the bulk of the assets (57.7 per cent) in BBB-rated investment grade.
Mr Anderson’s appointment was announced in July and since becoming co-manager on the Fixed Interest Trust he has reduced the index-linked exposure in the fund, as well as the aggregate life of bonds in the portfolio.
He has also bought positions in Porterbrook and Eversholt, both owners of UK rail rolling stock.
