Fatima Luis, manager of the F&C; Strategic Bond Fund, said that the true picture of the effects of the credit crunch was still unfolding and risk was a serious issue for lenders.

She considered the prospect of recession is not a certainty but suggested that the bond market is under-pricing and, as a result, corporate and high-yield spreads are not offering adequate compensation for downside risk and possible rising defaults.

“Financials are a big exception to this and therefore if the chances of a recession diminish in the coming months or the banks recapitalise, then we should see a very significant rally in the spreads on financials,” she said.

F&C; recently said of this month’s interest rate cut from 5.75 per cent to 5.5 per cent that it had been brought forward from expected cuts early next year.

Unless economic growth slowed and took the pressure off inflation, another cut would not be forthcoming, F&C;’s April LaRusse concluded.

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