Fixed IncomeSep 25 2013

What next for bonds?

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      To say fixed income has had a turbulent year could be seen as a bit of an understatement. According to the Investment Management Association (IMA), June saw the highest redemptions of fixed income funds by retail investors. The asset class saw £624m in outflows – the highest since IMA records began in 1992. Equities saw net retail sales of £884m – the highest monthly total since October 2006.

      The three worst-selling sectors for the month were bonds – the Sterling Corporate Bond, Global Bond and Sterling Strategic Bond sectors. Although Global and Strategic Bond recovered somewhat in July, placing 8th and 16th respectively, both with positive inflows, Sterling Corporate Bonds slipped to worst selling with net outflows of £131m. It was the best selling sector in July 2012.

      Equities have been the key beneficiaries of bond outflows, despite analysts suggesting valuations are looking expensive.

      Data from EPFR Global shows $19.7bn was invested in global equity funds in the second week of July – the highest amount for six months. In the same period, all bond funds saw $2.7bn of outflows. The only spot of fixed income to see inflows was high yield, which gained $760m in the week.

      Outflows of bonds had slowed somewhat by the third week of July, with just $700m taken out. At the time of writing, the total of bond fund redemptions since the start of June sits at $11bn.

      In the middle of this upheaval, the Bank of England welcomed its new governor, Mark Carney, at the start of July. And he has not taken long to make his mark on the economy.

      His inflation report, released on 9 August, showed a US-style ‘forward guidance’ on the future of interest rates. He states rates would be kept low until unemployment has fallen to 7 per cent – it currently stands at 7.8 per cent.

      The bank predicts this will not happen until 2016, although some analysts are saying it could happen a year earlier. The Fed-style report said it was to reduce “uncertainty about the future path of monetary policy as the economy recovers.” This is the first time the UK has had its unemployment rates explicitly linked to monetary policy. The bank’s base rate has been at 0.5 per cent since March 2009.

      The amount of outflows is undoubtedly down to the response from retail investors with regards to their anxieties about future tapering from the US Federal Reserve and other central banks across the globe.

      Performance

      Table 1 shows the top 10 funds for each fixed income sector over three years based on an initial £1,000 investment with net income reinvested as at 31 August 2013.

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