Implied default rates are also disconnected from reality, he suggested. The average default rate for BBB-rated debt is 0.4 per cent. But implied rates for euro, sterling and dollar-denominated credit range from 2.1 per cent to 2.9 per cent, according to the manager.
Mr Woolnough said he recognised the incongruity of extending duration in the US at a time when markets are pricing in a rate rise from the Federal Reserve this year.
“It’s not like US and euro interest rates are the same,” he said. “If 10-year bonds in Europe and the US were [both yielding] 1 per cent and you expected rates to go up [in the US] you would definitely own Europe.
“But you’re getting paid for that, people are pricing in a rate hike in the US. And look at the relative risk rewards in terms of upside versus downside.”