Fixed IncomeMar 5 2012

Bonds – where to go next?

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After the financial crisis, last August’s stockmarket wobble reignited fears in most investors’ minds and saw them flood to perceived safe havens.

With the turmoil in Europe, the credit market saw record inflows of more than £911m in the year to January 31 2011, while equities, which are seen to be at the top end of the risk scale, faltered.

However, some areas of credit were more popular than others. Short-dated bonds, which were popular pre-2007, came back into favour, as investors’ attitude toward risk flagged, and their anxiousness to be able to make a quick exit increased.

Jozef Prokes, a member of BlackRock’s fixed income portfolio management group, who focuses on covered bonds, says: “When you see inflows into short-duration bonds, that’s when investors believe that their rates are at the lowest and they want to protect themselves from inflation risk and to get short-term exposure that they can roll over quite quickly.

“What we’re seeing at the moment is that markets think rates will stay very low for the foreseeable future. We’re seeing clients becoming interested in these types of bonds, not because they’re expecting rates to go up, but because they’re expecting rates to be on hold and they want to get exposure away from money markets and go to slightly longer, still short duration, but between 1-3 years.”

Mr Prokes adds that the yield environment is quite attractive for these bonds and is not expecting any losses because of the slightly lower duration.

Long-dated government bonds have outperformed in the past year, with the iBoxx Sterling Non-Gilts 5-15 year index returning 9.3 per cent in the year to February 24 2012, compared with the iBoxx Sterling Non-Gilts 1-5 year index, which only returned 4.29 per cent.

However, according to John Hamilton, manager of the Jupiter Corporate Bond fund, this year could be the start of a turnaround.

Global growth

“A lot of people have been saying that last year was the year to be in long dated, therefore this year probably isn’t going to be,” he says.

Jeff Keen, fixed income fund manager at JO Hambro Investment Management (Johim), agrees. He argues that the prospect of global growth slowing, the Greek crisis and the global banking crisis saw the worst type of environment for short-dated bonds last year. However, as the situation improves, short-dated bonds could flourish once again.