Bonds are still no 'chance of a lifetime'

With inflation pressures removed, the Bank of England will be in a position to offer rate cuts, and though banks have currently written off almost $450bn (£226bn) since the start of the credit crisis, they have also raised some $330bn of new capital which provides them with the ammunition to create new loans once balance sheets become more appropriately positioned. And so the cycle repeats.

For corporate bond investor, most of this scenario is already priced in current valuations. Credit spreads are already anticipating significant increases in defaults, falling profits, covenant breaches and the like, and in some cases are pricing in some more to boot.

Until such time as credit spreads are able to tighten en masse, a key determinant of performance over the coming year will be, not only the careful selection of bonds and adequate diversification, but also the ability to raise funds in the present climate. Those funds able to remain liquid during this period will be more likely to benefit from the opportunities available. Those who are witnessing unit redemptions and loss of liquidity will struggle to perform regardless of their ability to call the markets in the right direction.

After almost five years of boring monotony and inadequate returns, corporate bonds just got interesting again, but “chance of a lifetime”? Not quite.

-Although there are many opportunities in the corporate bonds field, there is not the "chance of a lifetime" many managers are hyping.

- While economists are focusing on the price of petrol and food as the root cause of inflation, they are ignoring the oversupply of money.

- Money supply grew by 12 per cent in the UK over 2007 alone.

-Since the turn of the decade money supply has reached an annualised pace of 10 per cent

- The Monetary Policy Committee is now taking notice of this phenomenon.