Underlying yields in the Sterling High Yield bond sector range from a low of 5.5 per cent to 11.73 per cent for the Aegon High Yield Bond fund. Sterling Corporate Bond yields are lower. Even so, 5.14 per cent from the popular Invesco Perpetual Corporate Bond fund looks attractive compared to cash.
Performance of sectors over 1-yr
Source: Financial Express Analytics
Top 5 performing bond funds from the IMA Sterling Corporate Bond sector over 1-yr
| Rank | Fund | 1-yr (%) |
|---|---|---|
| 1 | M&G Strategic Corporate Bond | 27.7 |
| 2 | Invesco Perp Corporate Bond | 25.6 |
| 3 | M&G Corporate Bond | 22.5 |
| 4 | Schroder Corporate Bond | 22.3 |
| 5 | Gartmore Corporate Bond | 19.4 |
Source: Trustnet.com
Top 5 performing bond funds from the IMA Sterling Strategic Bond sector over 1-yr
| Rank | Fund | 1-yr (%) |
|---|---|---|
| 1 | Cazenove Strategic Bond | 27.0 |
| 2 | Fidelity Sterling Bond | 23.5 |
| 3 | Schroder Strategic Bond | 10.6 |
| 4 | UBS Active Bond | 6.5 |
| 5 | Sarasin Sterling Bond | 5.5 |
Source: Trustnet.com
Alistair Darling’s Pre-Budget decision to tackle the deficit only when the economy improves was well received by "bond vigilantes" in the gilt market, says Paul Brain, leader of Newton’s fixed income team.
Rates should remain stable, but investors want much more than the government's measly short-term rates or even the 3.7 per cent yield on ten year bonds. They are piling into corporate bonds, even though they no longer offer the average nine per cent returns and huge differential over gilts available at their peak.
"A lot of the spread has disappeared as the market has got more expensive," says Brain. Average corporate bond spreads have narrowed from 450 basis points (bps) to nearer 200, he adds.
Investors need to pick and chose investment grade stock carefully as the economy enters a period of anaemic growth. Brain says telcos were quick to cut costs and should maintain bond payouts. Consumer facing retailers could struggle, although cheaper budget brands will thrive.
Even the solid returns from utilities have not been enough for certain income seekers. They may be acting in haste as the sweep down the credit scale, warns Martin Foden, credit analyst at Royal London Asset Management. "The indiscriminate selling of bonds has turned in indiscriminate buying. The rehabilitation has been quicker than we expected."
Investors are even turning back to bank bonds, expecting tougher regulation to make their investments more attractive. Old bank subordinated debt is yielding 10 per cent. New issues are already paying higher coupons, but will convert to equities if bank capital levels plummet.
Investors are queuing up to buy new and more complex high yield issues, says Foden. Even mortgage backed securities from Nationwide, Lloyds and Land Securities have gone down well.
In the first such European deal in two years, spreads on a Commercial Mortgage Backed Security (CMBS) from Tesco were tighter than expected thanks to heavy demand.
"From thinking all securities are bad, investors are saying it is sensible to go for a senior bond with securities to one without. It all depends what assets the bond is charged against," says Foden.
Some speculative grade developments may be a step too far for some investors.
PIK bonds, or Payment in Kind notes, favoured by private equity firms during the buyout boom are back. They pay no cash coupon, but offer investors a payout in yet more debt.
The latest European issuer Wind Group is promising a yield equivalent of 12.5 per cent to compensate for the greater risks its PIK holders will take.