The past few years have been difficult for bond investors. But corporate bonds in particular have remained popular. They can provide a better environment and higher income, and come with more safety than equities.
According to recent figures from the Investment Association (IA, previously the Investment Management Association), fixed income funds were the second-worst selling in 2014 with just £1.3bn in net retail sales. For a comparison, equity funds saw inflows of £8.6bn, while the worst selling asset class was the much smaller money market space, which saw net inflows of £63m.
Last year saw continuing uncertainty in many fixed income markets, with swings in macroeconomic data and market volatility. October saw the US Federal Reserve end quantitative easing (QE) , after it accumulated $4.5tn (£2.9tn) in assets. Reaction has been mixed, with many calling it as a cause for concern, but others saying it will mean US monetary policy will return to a more normal environment.
Elsewhere, in the UK the inflation rate fell to 0.5 per cent in December – the equal lowest rate on record. The Office for National Statistics (ONS) said the drop – from 1 per cent in November – was due to cheaper fuel prices. The Bank of England has also held interest rates at 0.5 per cent for the 71st consecutive month and also kept its QE programme unchanged. The number of assets purchases under QE remains at £375bn.
QE has continued to spread from country to country. The European Central Bank (ECB) is the latest central bank to announce a programme. Mario Draghi, president of the bank, announced at the end of January that the ECB would be expanding its asset-purchasing programme to €60bn (£45bn) per month of euro-area bonds. The stimulus is planned to last until September 2016, with a total of €1.1tn (£820bn) of assets bought. Mr Draghi says the stimulus plan will continue “until we see a sustained adjustment in the path of inflation”.
Too late to the mark
John Pattullo, head of retail fixed income at Henderson, says, “It is a net positive but it’s five years too late. And it’s coincident with a weaker euro and a pickup in the money supply in Europe, which is favourable. I think a lot of the stimulus will come from the anticipated effects of QE, which is printing lots of euro, which means the euro goes down so you can export more. The direct effect means it makes the already ludicrously low bond yields even lower. I’m not convinced it’s going to have a huge effect on activity but a weaker euro will.”
