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Still value in corporate bonds but lower yields expected Go compare with our comparison table

Still value in corporate bonds but lower yields expected

14 June 2011 / by Paul Dicken

For many, the economic climate has been positive for bond investors; interest rates have remained low, while companies have been boosting their balance sheets offering attractive yields for credit.

In April this year, the sterling strategic bond sector kept its spot as the best selling of the Investment Management Association (IMA) sectors. The more flexible and potentially higher risk strategic bond funds available have proved popular as they cashed-in on attractive bond yields and improving corporate conditions.

Fund inflows

The Henderson Global Investors Strategic Bond Fund announced recently that it had now raised £1 billion in assets under management, reflecting the popularity of the fund which has had a distribution yield of between six and seven per cent during the first part of 2011.

Director of UK retail at Henderson, Simon Hillenbrand, said: “Support for these funds has grown as they allow fund managers to actively allocate across the spectrum of fixed interest investments.”

Other popular strategic bond funds are the Invesco Perpetual Monthly Income Plus Fund which is a £3.3bn fund, and the L&G Dynamic Bond Fund which has £1.6bn under management.

Corporate bonds outlook

Michael Matthews (pictured), in the fixed interest team at Invesco Perpetual, and co-manager of the Invesco Perpetual Global Bond Fund, recently said high yield bonds were still a strong area but he was proceeding with caution when investing in high yield bonds as yields were coming back down to more normal levels.

High yield bonds are those issued by companies seen as less secure, with lower credit ratings, and a higher risk of defaulting on the debt. Because of this the coupon or interest paid on bonds is higher, a reward for the risk of holding these assets.

Following the 2008 financial crisis many companies were issuing bonds with attractive yields to finance their operations, in part because banks have been reluctant to lend.

Interest rates

If interest rates go up, bonds, particularly gilts, decrease in value.

Although Matthews does not expect a sharp rise in rates in the near future he said his funds were holding short duration UK government gilts which minimises the loss in value if interest rates rise.

The two elements of a corporate bond are its coupon and its face value. Once issued, the actual market value of a bond changes depending on what happens in the market or to the bond issuer. So investors can both gain from increases in the market value of a bond or lose from falls in that value.

The coupon is a fixed level interest payment but the value of the yield changes inversely when the face value changes.

So if a bond is paying five per cent on £1000 that is £50 interest coupon. If the market value of the bond falls to £800 it will still pay out a £50 coupon so the yield increases to 6.25 per cent.

Financial sector

While not all corporate bond funds are buying bonds from banks and other financial institutions it is part of the bond market where yields are particularly high.

Michael Matthews said: “Financials are one of the cheapest stories and are paying a considerably higher yield than the rest of the market.

“All UK financials have raised capital, are reducing balance sheet sizes considerably and are holding higher levels of liquidity.”

While this backdrop creates some uncertainty on profits for equity investors Matthews sees these factors as positive for bond holders. Banks are looking to raise more capital and are offering relatively attractive terms to funds buying their bond issues.

No news, feature article or comment should be seen as a personal recommendation to invest.

The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Yields are not guaranteed and may be subject to change.

Different types of investment carry different levels of risk and may not be suitable for all investors.

Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

© Fair Investment Company Ltd

Bond Funds
Fund ManagerFundSectorFactsheetMore info
Henderson Strategic BondStrategic BondFactsheetMore Info >
Income Paid Quarterly. Investing in higher yielding assets which will include most types of fixed interest securities, this fund aims to deliver a quarterly income to investors. See latest fund factsheet for details.
Invesco Perpetual Monthly Income PlusStrategic BondFactsheetMore Info >
Income Paid Monthly. Popular income fund that aims to achieve a high level of income whilst seeking to maximise total return through investing in high yielding corporate and Government bonds, together with UK equities. See latest fund factsheet for details.
M&G Optimal IncomeStrategic Bond FactsheetMore Info >
Income Paid Twice Yearly.The fund aims to provide a total return to investors based on exposure to optimal income streams in investment markets. The fund invests across a broad range of fixed income assets according to where the fund manager identifies value. See latest fund factsheet for details.
Invesco Perpetual Global Bond Global BondsFactsheetMore Info >
Investing in a range of different international bonds, aiming to provide a income and growth return while providing relative capital security. See latest fund factsheet for details.
Kames Strategic Bond Strategic BondFactsheetMore Info >
The primary investment objective is to maximise total return (income plus capital ) by investing in global debt instruments,denominated in any currency, ranging from AAA Government Bonds through to high yield and emerging market corporate bonds. At least 50% of the fund will be invested in sterling and other currency denominated bonds hedged back to sterling. See latest fund factsheet for details.
Invesco Perpetual Corporate BondCorporate BondFactsheetMore Info >
Income Paid Twice Yearly. The Invesco Perpetual Corporate Bond Fund aims achieve a high level of overall return, with relative security of capital. It intends to invest primarily in fixed interest securities. See latest fund factsheet for details.
M&G Gilt and Fixed InterestUK GiltFactsheetMore Info >
The Fund aims to provide a secure income with stability of capital consistent with investment in gilts. The fund manager approach is a macroeconomic one with investment based on views on inflation, interest rates and economic growth. A minimum of 80% of the fund is invested in UK government bonds. See latest fund factsheet for details.
Corporate Bond FundSterling Corporate BondFactsheetMore Info >
Invests predominately in sterling denominated corporate bonds, while also invests in lower rated bonds to provide an income which is paid quarterly. Save 100% on Initial Charges.
International Bond Fund Global BondsFactsheetMore Info >
Invests in the world's bond markets, aiming to deliver a fixed income and capital growth. Save 100% on initial charges.

The value of investments and any return from them can fall as well as rise and you may not get back the full amount invested. Please ensure that you read the Important Risk Information below.