Corporate Bonds - end of the road?
It hasn’t been an easy year for corporate bonds. Bashed up by concerns over Greece, and the possible impact on the banking system, then just as they regain their poise the Federal Reserve announces the prospect of QE2, with higher inflation being an objective. As we have highlighted previously, 80% of the move in high quality corporate bonds can be accounted for by movements in Gilts, that is UK government bonds, and Gilts suffer at the hands of rising inflation expectations.
Whereas the problems of Greece (and others) will eventually be solved, inflation is a much more sticky problem for the long term, as we discussed here and illustrated with the following graph. The world has enjoyed a deflationary trend since 1980, but this is changing.
Previously we highlighted the highest quality corporate bond funds (Fidelity Moneybuilder Income, M&G Corporate Bond) for their capital preservation potential, and this status persists, and will become obvious again when the QE2- triggered enthusiasm for stock markets and commodities suffers a correction.
Yet going forward, when opportunities arise, take the chance to switch more into assets that should perform in an inflationary environment.
For example, in the lower risk bucket that includes funds with more emphasis on higher yielding corporate bonds, and absolute return funds linked to stock markets.
It is very encouraging that a number of strategic bond funds (such as Artemis Strategic Bond fund) are already illustrating that they can make money in this challenging environment.
(Taken from TopFunds Guide January 2011)