There is no 'free lunch' in bond investing

There is no 'free lunch' in bond investing

There is no "free lunch" when investing in bonds if looking for income, according to the guests on the latest FTAdviser podcast, which is sponsored by Artemis.

Addressing the issue of duration risk, Stephen Snowden, head of fixed income at Artemis, said that while inflation was currently higher than yields that could be different in future years.

He said: "Right now duration is not something to be frightened of, or interest rate risk. There's an important thing about bond mathematics which we all have to be respectful of and that is: to earn yield or to earn income you have to take some risk.

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"If you don't take duration risk, you don't earn income or earn the yield. In order to take advantage of these healthy yields today, you also have to accept the interest rate risk that goes with that. Regrettably in life there is no such thing as a free lunch. That has always been the case and continues to be the case."

Darius McDermott, investment adviser to the Chelsea range of multi-manager funds, said many of the bond fund managers he spoke to felt it was possible to get enough yield without taking huge duration risk at the moment.

McDermott said: “There is enough yield that you don't have to go and swing the bat to try and make huge capital gains if rates do fall dramatically. 

"We have been taking the opportunity to buy funds or even the odd ETF where the duration is around the five to seven years that has got decent yields.

"Yes, maybe we could make more on capital if rates do fall dramatically but why take that extra level of risk when I'm getting nicely compensated for taking less risk? Stephen is absolutely right, you have to take some risk clearly, but the risk-reward appears to be at that sort of duration position rather than really swinging the bat and going for huge capital gain."

You can listen to the podcast by using the player above or by finding us on Spotify, Acast, Apple Podcasts and most of the other main podcast platforms.