Talking Point  

Outlook for corporate bonds weak due to Brexit uncertainty

Outlook for corporate bonds weak due to Brexit uncertainty

Corporate bonds are entering a period of uncertainty and lower returns despite recent strength in the market, warned experts.

Data from Morningstar published end of October showed corporate bonds received net inflows of £436m in September, a sharp uptick from the £279m that was allocated to corporate bonds in August. 

But market participants said the outlook for corporate bonds is negative due to uncertainty from the UK’s impending general election. 

Ricky Chan, chartered financial planner and director at IFS Wealth and Pensions, said: "Longer duration corporate bonds will be more volatile in the coming months due to the political uncertainty (increasing credit risk), but there could be a base rate cut from Bank of England in early 2020.”

The bond price and interest rate have an inverse relationship meaning lower interest rates lead to higher bond prices and lower yields. 

Christopher Peel, chief investment officer at Tavistock Wealth, said: “Interest rates are likely to stay low for the next 12-24 months due to Brexit uncertainty.

"Yields will trade in a narrow range with returns significantly lower than the average dividend yield in the UK equity market.”

Udit Garg, head of wealth management at Sun Global Investments, said: “Sound bites are coming from the Labour Party, they have pledged to borrow heavily for their renationalisation policy. This will lead to a bigger deficit and the currency will weaken and UK bond prices will go up.”

But Mr Garg highlighted that as sovereign yields are negative across both the US and Europe, “the real alpha is in corporate bonds because of this”. 

Mr Garg added that because UK Libor rates are lower than US rates, there is less room for UK rates to fall than US rates and therefore UK corporate bonds are more defensive in nature compared to US counterparts.