Different types of bonds perform differently at different stages in the economic cycle, according to John Pattullo, head of retail fixed income at Henderson.
For example, Mr Pattullo says as the economy slows, government bonds tend to perform better, while in a strongly-performing economy investment grade and high yield corporate bonds will deliver better returns.
Therefore Mr Pattullo says investors need to think of diversifying not just in terms of allocating to bonds alongside other asset classes but also within their bond portfolios, in order to make the best of the economic environment.
Fixed income has performed very well in the last five years of record low interest rates, says Adrian Lowcock, senior investment manager of Bristol-based Hargreaves Lansdown.
However Mr Lowcock says since 2012 the market has been a little flatter as yields fell to very low levels before rebounding a bit.
Mr Lowcock says: “The rebound means the capital value of bonds fell. There are variances within this, though and investors have been able to make money form fixed income if they have been flexible.”
Looking at longer-term performance, Trevor Welsh, head of UK sovereign and inflation at Aviva Investors, says since the early 1980s the world has seen an unprecedented period of globalisation during which the manufacturing industry has shifted to low-cost centres in emerging countries such as China.
Mr Welsh says this has fuelled a sustained decline in inflation throughout the west, in turn leading to a steady increase in bond prices.
In recent years, Mr Welsh says policymakers have adapted extraordinarily loose monetary policy in an attempt to foster economic growth. Nevertheless, Mr Welsh says inflation expectations have remained remarkably subdued and bond prices have been supported by investors’ desire to hunt out stable returns.
He says there have been notable periods of weakness in credit markets. Mr Welsh says these have occurred during times of economic crisis, most notably during the financial crisis following the collapse of Lehman Brothers in 2008.
Today, Mr Welsh says there are signs that interest rates in the developed world may soon rise from its current record lows.
While this has had a negative impact on government bond prices, Mr Welsh says higher yielding securities have continued to deliver positive returns.
