Why corporate bonds now?

We have been repeating this message to anyone who will listen for some time. Indeed, at the end of November, our message to buy bonds and then walk away for a year spread through the markets a little more widely and rapidly than we had expected. In kind, the narrative shift on interest rates from “higher for longer” to “rate cuts in 2024” was equally wider and faster than most were expecting. The catalyst proved to be the 'dot plot' in the minutes from the Federal Reserve's December meeting, which revealed rate cuts in 2024. The market dutifully rushed into bonds.

In December, the Federal Reserve indicated that it could start unravelling its series of rate rises as soon as next Spring. This 'pivot' prompted a further huge rally in global bond markets and, in fact, the biggest quarterly performance seen for over a decade.

But even with a powerful finish to 2024 we still see the market as good value. As of now, UK economic data points not towards disaster but mediocrity. The Bank of England was slow to raise rates. It would be no surprise if they were slow to cut.

How have we reacted to this in our fund?

In terms of the Artemis Corporate Bond Fund, following a sharp sell-off in the summer of 2023, we did several switches towards the end of the year, adding risk back into the fund, mainly through extending maturities. We also used the sell-off as an opportunity to buy back several longer-dated bonds which had sharply fallen in price. This proved to be timely as they caught the wind of the rally in December. After the rally we rotated back into shorter-dated bonds ready for the start of the new year.

A final word

Our wider team has been working in fund management for almost 30 years. One thing we’ve observed over the decades: it is rare for bond managers to express much excitement about their funds. The stereotypical bond manager is someone boring, scrupulous and more concerned with downside risk than upside potential. Like many stereotypes, this one has some basis in truth. It is rare for us to start banging on our desks about the potential returns from bonds. But when we do, it might be worth listening.

By Stephen Snowden, Head of Fixed Income, Artemis

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