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How are corporate bond experts investing?

Investment | Fixed Interest

By Justin Modray, published 06 July 2010.
Helpful? 21

Should you be investing in, or altering existing exposure to, corporate bonds? And, if so, how? Let's take a look at what the experts are doing.

The outlook for government and corporate bonds has been a tough one to call over the last year due to major uncertainty over the main factors that affect performance: interest rates, inflation and financial robustness of the governments and companies issuing bonds.

Rising inflation and/or interest rates tend to push down bond prices as does a perceived weakening in a government’s or company’s financial strength – and, of course, vice-versa (to find out why read our fixed interest page).

But bonds issued by higher risk governments and companies (called 'high yield') tend to be less influenced by the above factors and move more in line with stockmarkets. And safer bonds (called 'investment grade') also tend to benefit when stockmarkets are troubled as they’re seen as a safer haven.

The outlook

At the moment there are mixed views on what will happen to interest rates, inflation and stockmarkets. I’m in the camp that believes things are quite bleak, hence interest rates will remain low and inflation/stockmarkets will fall – reason to prefer safer high quality bonds. But you might feel differently.

If things become sufficiently bad that governments inject more money into their economies (called 'quantitative easing'), then stockmarkets might react favourably which could boost higher yield bonds at that time.

We also shouldn’t forget currency movements, which affect the value of overseas bonds in the hands of a UK investor. If you believe the pound will weaken versus the US dollar then holding US Government treasury bills seems more sensible than UK gilts.

What do the experts think?

I’ve taken a look at a few successful strategic bond funds, where managers can invest in investment grade and high yield bonds however they wish. Data is only currently available as at the end of May, but it still gives a good feel for how those who invest in fixed interest for a living are thinking.

Fund% Investment
Grade/Cash
% High YieldLargest Holding
Aegon Strategic Bond 69% 31% Canadian Government bonds
Artemis Strategic Bond 52% 48% Lloyds Bank bonds
Fidelity Strategic Bond 75% 25% US Treasury bills
Henderson Preference & Bond 67% 33% Barclays Bank bonds
Jupiter Strategic Bond 51% 49% Canadian Government bonds
L&G Dynamic Bond 65% 35% Groupama SA bonds
M&G Optimal Income 66% 34% US Treasury bills

The overall trend seems to be caution with a bias towards investment grade bonds. Although when looking at underlying holdings the managers are generally favouring decent quality corporate bonds over government bonds (I suspect they believe them to be better value).

Should you take any action?

If your portfolio has exposure to high yield bonds then now might be a sensible time to trim it back, if you agree with the above outlook. As for putting new money into bonds I’d be inclined to focus on the higher quality end of the scale.

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Readers' Comments (1) - To post a comment please register or login .


Comment by brianc at 6:04pm on 14 Jul 2010:

As interest rates are so low many retired people (like myself) have transferred a percentage of their cash ISAs into Bond Funds and Equity Funds ISAs. Articles such as this are therefore very helpful in keeping us up to date with experts thinking.

Thanks.