Payne (pictured), who heads up the five crown-rated Henderson Sterling Bond fund, says that he cannot see a sustained rise in gilt yields while central banks continue with the current levels of quantitative easing. Yesterday saw gilt yields rise above 2 per cent for the first time since May last year; however Payne does not believe they will rise much further.
The manager says that the rise in gilt yields is due to the recent rally. However, he expects a market correction soon that will bring yields back in line.
"The outlook for the global economy does look a bit better and I think this risk-on period will be here to stay for the next few months, which could see gilt yields rise," he said.
"Despite this, I think at some point later in the year we will enter a risk-off stage that will cap the rise in government bond yields."
"The progress policymakers in Europe have made has taken the attractiveness away from better-rated government bonds."
"However, I’m not expecting to see a big sell-off in government bonds as investors will still want security."
Payne has co-managed the £508m Henderson Sterling Bond fund with fellow FE Alpha Manager Stephen Thariyan since April 2009.
According to FE Analytics, over that period the fund is the best-performing portfolio in the IMA Sterling Corporate Bond sector, with returns of 113.27 per cent.
Performance of fund vs sector since April 2009
Source: FE Analytics
The manager also heads up two other portfolios in the IMA Sterling Corporate Bond sector, the Henderson All Stocks and Henderson Institutional Long Dated Credit funds.
Payne admits that the high level of monetary stimulus has meant he has had to look further up the risk scale for yield than he would have liked. However, he says he has still managed to find opportunities in this area of the market, such as in financials.
"At the moment, we like financials as the spreads are very attractively priced. Specifically, we like lower tier-two banks. I think these have attractive valuations and I think we are likely to see a pickup in the issuance of subordinate bonds next year, meaning higher yields."
"We tend to focus on UK, US and Swiss banks as they are beginning to look in good shape. We saw yesterday that RBS launched a cash tender offer [share buyback scheme] which is good news," he said.
Henderson Sterling Bond – which is yielding 3.4 per cent – lists HSBC, Barclays and Nationwide in its top-10.
Last year was a particularly good year for bank share prices, but Payne does not expect returns next year to be quite as high.
"Whether or not I think financials can do it again, I don’t know," he said.
"I think the starting-point valuations are a lot higher than they were in 2012. Last year, most fixed income investors who held banks saw returns of between 20 and 30 per cent and I think it would be a big ask for it to happen again."
He added: "Bigger returns are still potentially out there, but I don’t think that we will see it as I think we will continue to see spread compression from the banks."
The fund requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.45 per cent.