Quantitative Easing

After the Kwarteng mini-budget chaos…Are bonds back?

Late last month, it looked like this would be the year the word “bond” – which traditionally inspires a sense of reassurance – was instead associated with a growing sense of alarm.

Suddenly, however, some fund managers are taking a different view.

This is despite the 20% drop since January in the Bloomberg Global Bond Aggregate Index, which is made up of those fixed-interest investments issued by corporations and governments as a means of borrowing.

Bond prices have been hit not only by inflation, but also by successive interest rate hikes, including this week’s upward moves in the UK and US.

Even more harm has been inflicted by Kwasi Kwarteng’s mini-budget on UK government gold bonds.

Higher interest rates make bond income less attractive, and when bond prices fall, bond yields rise.

In June, many investors were fleeing corporate and government bonds as the threat of a recession grew.

Yet, as this column has reported, a few managers have tentatively put money into corporate bond funds, which are the easiest way to gain exposure to this area. Today, this trend is becoming more widespread, as the distribution yields of funds become more attractive.

Some of these managers profess a level of astonishment at the thought of considering bonds of any kind in the wake of this market rout. But they point to the generous returns offered in the sector that have resulted from lower prices. Phil Smeaton, of wealth manager Atomos, says: “These are some of the best prospects for returns we have seen in a long time.”

The sharp decline 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, said: “The outlook going forward will be volatile, but now is the time to start building larger positions in credit.”

Additionally, corporate bonds now look “very cheap,” according to Schroder Strategic Credit fund manager Peter Harvey.

“Investment-grade bonds, those with a credit rating of BBB or higher, from companies like Aviva, BT and Vodafone, yield around 5.7%,” he says.

“If you go for lower-rated bonds, yields of 11% are available.”

Dan Cartridge of Hawksmoor Investment Management says he and his colleagues have joined the club of corporate bond fund enthusiasts.

“Not so long ago there were none of these funds in our portfolios,” he says. “They are now around 20 percent. We made this decision because we believe that these funds can generate a positive return over three to five years.

Yields above 7 percent offset the additional risk of holding corporate bonds rather than gilts, given the possibility of default. Cartridge says: “For a combination of long and short terms, 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 holds stakes in such household names as Compass, Pepsi Cola, RAC and Rentokil).

James Yardley of Chelsea Financial Services said: “We have started to increase our holdings in corporate bond funds cautiously since the start of the year and we believe this is a good long-term buy. term.”

“However, we still think yields could widen further, and so we are waiting for real signs of stress before adding aggressively.”

He points out that the Bank of England, which bought £20bn of corporate bonds as part of its quantitative easing programme, has not yet begun selling off that pile of debt.

Ben Yearsley of Shore Financial Planning is also making a foray into corporate bond funds, but with some caution.

“It’s not a one-sided bet, because if interest rates continue to rise more than expected, gilts and corporate bonds will continue to fall,” he says.

Yearsley favors Allianz Strategic Bond, AXA Global Strategic Bond, Premier Miton Corporate Bond Monthly Income and Ninety One Global Total Return Credit.

Professionals who embrace corporate bond funds have made a reasoned assessment of the outlook, trying to ignore recent troubling events.

Following their lead, I will commit money to a range of funds. It’s not a foolproof ploy to make money, but at least anyone investing in the sector now can be sure that we have a government that has an idea of ​​how bond markets work and how vitally important they are.

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