Bond fund bosses declare an end to giant rallies in junior banking credit

FUND MANAGERS are ditching junior bonds issued by banks that have been forced to take state investments, believing the stellar rallies of the last few months are now well and truly finished.<br /><br />The bonds, issued by banks such as bailed-out Lloyds Banking Group, have staged a massive recovery since mid-March, but all easy money has now been made and the risk of sharp losses remains, the fund managers say.<br /><br />Head of credit at asset management giant Gartmore, John Anderson, called time on rallies in the banks&rsquo; junior or &ldquo;subordinated&rdquo; bonds, a type of debt that ranks low when it comes to recovering losses if a company goes bust.<br /><br />He said Lloyds and RBS, which are part-nationalised after nearing collapse at the height of the financial crisis, still carry a great deal of uncertainty.<br /><br />&ldquo;They are still very much in the intensive care unit. You have had Bradford &amp; Bingley default on bonds, and you have just seen Northern Rock do it too,&rdquo; he said.<br /><br />Junior financial bonds plummeted in value in the second half of 2008, amid fears the banks could fail. But since March they have rebounded from around 30p in the pound to 70p or 80p. Such rises are rare in bond markets, which tend to display very little volatility.<br /><br />Rensburg Sheppards senior bond analyst Darren Ruane said state-backed bank bonds could actually fall to having zero value, as have Bradford &amp; Bingley&rsquo;s.<br /><br />&ldquo;If the banks were to become fully nationalised, they could become worthless,&rdquo; he said.