At the end of last month, it looked like this was going to be the year when the word “bond” — which traditionally instilled a sense of reassurance — was instead associated with a sense of mounting apprehension.
But suddenly some fund managers see it differently.
This is despite the 20 percent drop since January in the Bloomberg Global Bond Aggregate Index, which consists of these fixed-income investments issued by corporations and governments as a way to borrow.
Bond prices have been hit not only by inflation, but also by successive rate hikes, including this week’s upward moves in the UK and US.
More damage was done by Kwasi Kwarteng’s mini-Budget to UK government gilt-edged bonds.
Higher interest rates make income on bonds less attractive, and when bond prices fall, their yields rise.
In June, many investors fled corporate and government bonds as the threat of a recession mounted.
But as this column reported, a few managers are cautiously putting money into corporate bond funds, which is the easiest way to get exposure to this area. Now, this trend is expanding as the funds’ distribution yields become more attractive.
Some of these managers express their surprise that after the slump in this market, they are considering bonds of any kind.
But they point to the generous returns that the sector is offering as a result of the price drop. Phil Smeaton of asset manager Atomos says, “These are some of the best yield prospects we’ve seen in a long time.”
The sharp drop means prices may already be reflecting the possibility of a deeper economic downturn, as some experts argue.
David Zahn, head of European Fixed Income at Franklin Templeton, says: ‘The outlook for the future will be volatile, but now is the time to build bigger positions in credit.’
Plus, corporate bonds now look “very cheap,” said Peter Harvey, manager of the Schroder Strategic Credit fund.
“Investment-grade bonds, those with a credit rating of BBB or higher, from companies like Aviva, BT and Vodafone, yield about 5.7 percent,” he says.
“If you choose lower-rated bonds, returns of 11 percent are available.”
Dan Cartridge, of Hawksmoor Investment Management, says he and his colleagues have joined the club of enthusiastic corporate bond funds.
“Not so long ago, these funds weren’t in our portfolios,” he says. ‘They now represent about 20 percent. We have taken this step because we believe that these funds can deliver positive returns in three to five years.’
Yields above 7 percent offset the additional risk associated with holding corporate bonds rather than government bonds, taking into account the possibility of default. Cartridge says: ‘For a mix of long and short maturities, we hold Artemis Corporate Bond, Close Select Income, Man GLG Corporate Bond and Schroder Strategic Credit.’
Chelsea Financial Services has also added Artemis Corporate Bond to its portfolios (the fund has holdings in well-known names such as Compass, Pepsi Cola, RAC and Rentokil).
James Yardley of Chelsea Financial Services said: “Since the beginning of the year, we have started cautiously increasing our exposure to corporate bond funds and we think it’s a good long-term buy.
“However, we still think yields could rise further, so we’re waiting for real signs of stress before adding aggressively.”
He points out that the Bank of England, which has bought £20bn worth of corporate bonds as part of its quantitative easing program, has yet to start selling this pile of debt.
Ben Yearsley, of Shore Financial Planning, is also making a foray into corporate bond funds, but with some caution.
“This is not a one-way street because if interest rates continue to rise faster than expected, government bonds and corporate bonds will continue to fall,” he says.
Yearsley prefers Allianz Strategic Bond, AXA Global Strategic Bond, Premier Miton Corporate Bond Monthly Income and Ninety One Global Total Return Credit.
The professionals embracing corporate bond funds have made an informed assessment of the outlook and tried to shake off the recent troubling events.
Following their example, I will put some money into a series of funds. This isn’t a fixed plan to make money, but at least anyone investing in the industry right now can rest assured that we have a government that knows how the bond markets work and how important they are.
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