“Funding for Lending” to contribute to credit easing

Fidelity fixed income portfolio manager, Ian Spreadbury, said that the Government’s recently announced targeted measures to ease credit conditions could have an impact but not too much should be expected from them.

Spreadbury said: “Conventional monetary policy is impotent against the deflationary forces of deleveraging in the UK economy and the efficacy of unconventional quantitative easing is questionable. The serious problems of indebtedness and the Eurozone crisis are still with us and there is not much the Bank of England can do to solve them”. In recent Mansion House speeches, Chancellor George Osborne and Bank of England governor Mervyn King announced a “funding for lending” scheme to give cheap funding to banks, conditional on lending to businesses and households, and activation of an extended collateral term repo facility, providing liquidity against a wide range of collateral. The moves are seen as recognition that existing quantitative easing is not enough.

From a fixed income investor perspective, Spreadbury commented: “My concern as a bond investor is that as Gilt yields grind lower, the risks become more asymmetric. They may well stay low for sometime but at these levels I’m thinking about protecting the price downside caused by an eventual increase in yields. Without an improvement in growth it also makes sense to keep a defensive stance when investing in corporate bonds. Despite strong company fundamentals, this market is not immune to the weakening macro backdrop.”