Standard Life stays safe with government bonds

By Emelia Sithole and George Matlock

LONDON (Reuters) - While markets display jumps and plunges on the crest of the credit crunch wave, one of Britain's more cautious investors is holding firmly onto the bonds life raft and sees more value in government debt to come.

Government debt markets retreated on Monday as more governments took concrete action to bolster the banking system, helping global shares rally and dampening flight to quality flows.

Equities .FTEU3 and bond prices dropped over the course of last week, but unperturbed Andrew Milligan, head of global strategy at Edinburgh-based Standard Life Investments with 130.6 billion pounds-worth of assets under management, said he was sticking with fixed-income.

"We are not selling government bonds at the moment," Milligan told Reuters in an interview.

He said that while bonds have rallied sharply in recent weeks, Standard Life's economic, inflation and interest rates outlook was still below consensus.

"We are going to be seeing very sharp short rate cuts during the course of the coming year so we are happy to hold a heavy position in international government bonds in our portfolios."

Milligan favors German debt, the euro zone's benchmark and most liquid government bonds, because he sees more scope for rate cuts by the European Central Bank, which have lagged the U.S. Federal Reserve and the Bank of England.

But with Greek 10-year government bond yields topping 100 basis points over Bunds last week - the first time a euro zone sovereign's spread has moved into three digits - it is only a matter of time before peripheral debt becomes attractive again.

"(With spreads) at record highs since the euro was formed then from my point of view, a priori that would be very interesting indeed to look into and to start thinking of buying," he said.

Last week, it wasn't only equities which suffered from banking sector woes, bonds too dropped sharply as investors fretted over likely increased debt supply from government efforts to cure the credit crisis. Market participants say it will take a while for the various government measures to restore market equilibrium.

LESS RISK ALLURE TO STAY

"There will be a recession, even if no one actually likes the sort of restructuring that it brings," said Milligan.

"Holding bonds is therefore warranted."

Anecdotal evidence with private wealth bankers showed clients are putting cash into bonds with a very short maturity until they come due, he said.

"They know that they'll only get a percent in terms of income but in terms of sleeping at night they are happy," he said.