The name's Bond
Are bonds still a safe haven?
Investment trusts investing in bonds have been in high demand this year, with the Debt – Loans & Bonds sector currently the only investment trust sector trading on a premium. The sector trades at 2% premium, has an attractive yield of 8% and over one, five and ten years has returned 10%, 58% and 65% respectively.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Actively managed investment trusts that invest in a range of bonds, loans and securities have had a storming year, with historically high yields attracting investors. The Debt – Loans and Bonds sector is in vogue and is currently the only investment trust sector trading at a premium.
“Debt is by definition less risky than equity, so for investors who want to lock in some profit on their equity investments and still get a return on their capital with better downside protection, high yield bonds or leveraged loans are a good place to be.”
“The investment trust structure allows bond managers to invest in less liquid bonds which are harder to buy and sell. The managers can also use gearing – borrowing to invest – which can be very helpful to take advantage of opportunities in the fast-moving bond markets.”
We asked investment trust managers from the Debt – Loans & Bonds sector whether bonds are still a safe haven and what risks they see ahead.
Are bonds still a safe investment?
Pieter Staelens, Portfolio Manager of CVC Income & Growth, said: “The economic environment is uncertain but corporate earnings are holding up well, as indicated by most equity indices at or near all-time highs. Debt is by definition less risky than equity, so for investors who want to lock in some profit on their equity investments and still get a return on their capital with better downside protection, high yield bonds or leveraged loans are a good place to be.”
Rhys Davies, Manager of Invesco Bond Income Plus, said: “While they are not risk-free, high yield bonds offer a compelling source of income. With careful selection and active management, we can build a portfolio that delivers attractive income relative to cash. Furthermore, many high yield bonds still trade below par, offering the added potential for capital gains.
“While they are not risk-free, high yield bonds offer a compelling source of income. With careful selection and active management, we can build a portfolio that delivers attractive income relative to cash.”
“Market fundamentals are supportive of high yield bonds right now. Corporate earnings are stable or growing, and demand for the asset class remains strong, enabling companies to refinance on favourable terms. However, this positive backdrop has also compressed yields from the highs of 2022-23. In an asset class where the upside is capped and downside risks persist, disciplined bond picking is essential.”
Eoin Walsh, Manager of TwentyFour Select Monthly Income, said: “Investors should always be cautious and aware of the risks involved when looking at high yield bonds. The term ‘high yield’ usually refers to corporate bonds that are rated below investment grade, meaning a rating of BB+ and lower. However, we find that sub-investment grade bonds issued by banks and insurance companies, as well as asset-backed securities, often offer much more attractive risk/reward characteristics than corporate bonds.
“We have seen strong demand for corporate bonds in recent months which has left credit spreads – the premium investors demand for holding corporate risk over government bonds – tighter than the long-term average, at a time when macroeconomic uncertainty is elevated. However, credit fundamentals such as corporate, bank and consumer balance sheets look to be in robust shape, and therefore tighter spreads are arguably justified in many cases.”
Adam English, Fund Manager of M&G Credit Income Investment Trust, said: “Whilst high bond yields currently appear attractive, yields are facing various economic headwinds in the shape of budget deficits, significant growth headwinds, tariff uncertainty, and stubbornly high inflation. For these reasons we prefer floating-rate corporate debt which has a ‘risk free’ yield moving broadly in line with the Bank of England base rate combined with a yield premium related to the corporation we are lending to. Hence portfolio returns more accurately reflect the strength of where our expertise lies, which is credit selection and analysis.”
“…we prefer floating-rate corporate debt which has a ‘risk free’ yield moving broadly in line with the Bank of England base rate combined with a yield premium related to the corporation we are lending to.”
What are the main risks with bond funds?
Rhys Davies, Manager of Invesco Bond Income Plus, said: “The primary risk in a high yield bond fund is credit risk, which is the possibility that a borrower fails to repay their debt. This is managed through rigorous credit analysis and understanding the economic backdrop.
“The second key risk is duration risk – the sensitivity of bond prices to interest rate changes, which is closely linked to inflation. Rising yields mean bond prices fall, so managing duration exposure is also important.”
Eoin Walsh, Manager of TwentyFour Select Monthly Income, said: “The poor fiscal position of many countries poses a risk for central banks and for investors, volatility is high, and we think the case for investing in very long dated bonds is poor. Geopolitical risks in particular are elevated, which could provoke spread widening. Tighter spreads are justified by healthy fundamentals and the solid GDP growth currently being enjoyed globally, but spread widening can be painful for investors, especially in longer maturity bonds, so we need to balance the attractive yields available against tighter spreads in order to target attractive returns without taking undue risks.”
To read more, you can read the full press release on bonds here.
