Global bonds climb despite downgrades

The safety of bonds took a hit 12 months ago. But they have proved an essential part of investors' plans

After taking a massive hit from the historic United States ratings downgrade 12 months ago, global bonds have staged a remarkable recovery.

Funds containing the bonds offered reliable returns after the stock market crash five years ago. In fact over five years they are the third best performing sector behind two similar bond-focused UK gilt fund sectors.

But their attractiveness was challenged when the United States' investment rating was downgraded for the first time in its history on 6 August 2011. The credit rating agency Standard & Poor's cut the rating on concerns over budget deficits.

But after a wobbly few months when returns looked less good, the funds have responded by posting a 4 per cent climb since the downgrading. In fact, despite continuing concerns about the euro countries, global bond funds were the third best sector over the last three months.

"The higher quality government bonds will remain a safe haven for investors, even if they do lose their top status – it's all relative," said Darius McDermott of Chelsea Financial Services.

Part of their continuing good performance is the controlled management of currency risk, explained Jim Leavis, head of retail fixed interest at M&G Investments. "Global bond funds have benefited from the breadth of their investable universe," he said. "On top of actively managing their bond investments, managers have also been able to use currency exposures as an important driver of returns."

The fact is that investors are still flocking to US bonds as a relatively safe haven, against the background of fluctuating global markets and the continuing eurozone crisis. But while global bonds are US-bond heavy, many spread their investment across the globe. Consequently, would they be hit by a euro collapse?

"If a credible solution were found to the crisis, then Spanish and Italian bonds would offer a great opportunity," said Martin Harvey, manager of the Threadneedle Global Bond Fund. "But a messy conclusion to the crisis would send shockwaves through the global financial system."

The question for investors is then what will happen in Europe and how will that affect bonds? "We suspect that if quantitative easing has finished, then bond yields will rise quite significantly over the next 12 months," said David Coombs, of the Rathbond Strategic Bond fund.

But longer term, bond funds will fall from being near the top of the performance tables, warned Phil Milburn, of Kames Capital Strategic Bond fund. "The returns from bonds in recent years have been abnormal. Normally the majority of returns comes from income, but this hasn't been the case. In the future, returns will be lower."

However, Darius McDermott believes bonds will always have an important role as part of an investment portfolio, for diversification and income.

"The global bond sector is very diverse, encompassing global, European and emerging market bond funds, so investors need to look carefully at a fund before investing, to make sure they are clear about its remit," he advised.

"My favourite fund in this sector is the Old Mutual Global Strategic Bond fund. There are also funds in the UK strategic bond sector which have an international slant. Of these I like the Kames Capital Strategic Bond."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at

sportWWE latest including Sting vs Triple H, Brock Lesnar vs Roman Reigns and The Undertaker vs Bray Wyatt
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Arts and Entertainment
tvPoldark, TV review
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
    How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

    How to make your own Easter egg

    Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
    Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

    Bill Granger's twist on Easter Sunday lunch

    Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
    Joe Marler: 'It's the way I think the game should be played'

    Joe Marler: 'It's the way I think the game should be played'

    The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
    Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

    Cricket World Cup 2015

    Has the success of the tournament spelt the end for Test matches?
    The Last Word: Justin Gatlin knows the price of everything, the value of nothing

    Michael Calvin's Last Word

    Justin Gatlin knows the price of everything, the value of nothing