Bloomberg News

Standard Life May Buy High-Yield Bonds as Rates Stay Low

October 11, 2011

(Updates with today’s yields in ninth paragraph.)

Oct. 11 (Bloomberg) -- Standard Life Investments Ltd., Edinburgh’s largest money manager, may buy high-yield corporate bonds after the biggest drop in three years.

Global high-yield debt, or junk bonds, lost 7.06 percent in the third quarter, the most since the collapse of Lehman Brothers Holdings Inc. in September 2008, based on indexes compiled by Bank of America Merrill Lynch. The sovereign debt crisis prompted investors to buy safer assets, fueling a 7.9 percent gain in German bunds over the same period.

“We are beginning to look at high yield again,” Andrew Sutherland, head of credit at Standard Life, said in an interview at the company’s office in the Scottish capital. “If markets turn around, that sector could snap in very quickly. We wouldn’t want to miss it, but are pacing ourselves very gradually. High yield still looks attractive.”

Policy makers are likely to keep interest rates low to help safeguard any economic recovery, Sutherland, who is responsible for 27 billion pounds ($42.2 billion), said on Oct. 4. Standard Life overall manages 157 billion pounds.

The Bank of England, which left its benchmark interest rate at a record-low 0.5 percent on Oct. 6, raised the ceiling for so-called quantitative easing to 275 billion pounds from 200 billion pounds. That’s the biggest increase since the first round of stimulus in March 2009. Only 11 of 32 economists in a Bloomberg News survey predicted the increase.

Trichet’s Risks

European Central Bank President Jean-Claude Trichet said the same day that the euro area economy is facing “intensified downside risks.” The ECB left its refinancing rate at 1.5 percent and said it will resume covered-bond purchases and reintroduce yearlong loans for banks.

“We could see a rush to yield because whatever happens interest rates are going to be kept low for a long, long time,” said Sutherland. “The central banks are now moving from a focus on inflation to a focus on growth. They know that the big problem they have is debt and one of the best options is growth to get rid of it. That basically means you are going to keep getting demand for higher-yielding assets.”

Sutherland is adding to holdings of bank debt and favors Lloyds Banking Group Plc in the U.K. as yields on government debt remain relatively low.

The yield on the benchmark German 10-year bond reached a record 1.636 percent on Sept. 23. The 2.25 percent security due September 2021, a benchmark for European debt, yielded 2.06 percent at 10:44 a.m. London time. The Lloyds LBG Capital No. 2 Plc 16.125 percent security maturing in 2024 yielded 13.90 percent.

“At these spread levels banks are looking attractive and we are maintaining an overweight position,” Sutherland said. “In the U.K. we still like Lloyd’s. In Europe, we tended to go with Scandinavian banks. We’ve tended to go for American banks as well, though that has not been overly helpful.”

--Editors: Tim Farrand, Rodney Jefferson

To contact the reporter responsible for this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net;

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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