Mark Dampier: Ah, corporate bonds, we meet again

The Analyst

Perhaps I should apologise to regular readers for sounding like a broken record and constantly banging on about interest rates. The simple reason is that I don't believe many people realise where interest rates are likely to go over the next few months. The Bank of England meets again next Thursday and I expect to see another substantial rate cut. I think that, by February, interest rates could be 1 per cent, a level never seen since the Bank of England was formed in 1694.

So what does this mean for instant-access bank accounts? Well, rates are bound to be slashed and the return on cash is likely to be paltry. Now, I would certainly not advocate that people shift all their money out of cash deposits. However, many investors, having been spooked by falling stock markets, now have excess money in cash. Will they be happy to accept a minuscule cash rate? Or will they look to put some of those assets elsewhere in search of returns?

Those who can stomach a bit of risk in exchange for the potential of greater returns should consider the incredible opportunity offered by corporate bond funds. This week, I am highlighting the Investec Sterling Bond Fund, which has a highly flexible investment mandate and can invest in overseas corporate bond markets, UK corporate bonds or high-yield bonds.

Anyone looking at the performance of corporate bonds over recent months will not be enamoured with the thought of holding any themselves. To use a technical phrase, they have been absolutely mullered. A major reason behind this is the unequal treatment by regulators, particularly in the USA, of major institutions that have got into difficulty. Some have been saved while others have been allowed to go to the wall, and this has scared off long-term holders of corporate bonds. Over the past six months or so, we have seen a huge amount of distressed selling as institutional investors, desperate for cash, have dumped bonds on to the market and driven prices down. The result is that yield spreads (by which I mean the difference in yield between government bonds and corporate bonds) have blown out to levels not seen since the 1930s.

So let's look at what will have to happen in order for current bond prices to seem accurate. In the 1930s, about one-tenth of investment-grade bonds defaulted on their debt over a five-year period. The current market is predicting that half the market will default! Now, I'd be the first to say that the current economic outlook is grim, but is it really five times worse than the Great Depression? Surely that cannot be right. Even a situation that is equally as bad as the Great Depression means that there is value in parts of the bond market.

As ever, it is impossible to pick the exact best moment to buy. It is entirely feasible that things will get worse before they get better for bond investors. However, while they are waiting for a recovery they are receiving good yields (which is tax-free in an ISA or Sipp, don't forget). For the first time, the potential medium-term return on bonds is every bit as good as, perhaps even better than, that in the equity market.

The Investec team are extremely experienced in this area, using a combination of economic research to analyse the overall situation and individual bond research to pick up attractive bonds. At the moment, the portfolio has more in non-consumer-focused, defensive areas with good cash flow, such as utilities.

Bond investing is a huge part of Investec's business so investors are getting a very dedicated team under fund manager John Stopford. The current running yield is 6.6 per cent; the gross redemption yield is 9.3 per cent.

While the news looks awful, both economically and in the markets, investors should try not to bury their heads in the sand about it. Market falls such as this bring the most incredible opportunities along in due course. Now is the time to be looking at some of these opportunities, and corporate bonds must be one of the first ports of call.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
News
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014
peopleTim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
News
people
Life and Style
techApp to start sending headlines, TV clips and ads to your phone
Arts and Entertainment
Taylor Swift crawls through the legs of twerking dancers in her 'Shake It Off' music video
musicEarl Sweatshirt thinks so
Life and Style
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Planning Manager (Training, Learning and Development) - London

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

    Asset Finance Solicitor

    Highly Competitive Salary: Austen Lloyd: CITY - ASSET FINANCE - An outstanding...

    HR Analyst - Banking - Bristol - £350-£400

    £350 - £400 per day: Orgtel: HR Analyst - Banking - Bristol - £350 - £400 per ...

    Techincal Accountant-Insurance-Bank-£550/day

    £475 - £550 per day + competitive: Orgtel: Senior Technical Accountant-Insuran...

    Day In a Page

    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
    Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

    Lauded therapist still in limbo as battle to stay in Britain drags on

    Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
    Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

    Lewis Fry Richardson's weather forecasts changed the world...

    But could his predictions of war do the same?
    Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

    'I want to have contact with the audience, not iPhones'

    Kate Bush asks fans not to take photos at her London gigs
    Under-35s have rated gardening in their top five favourite leisure activities, but why?

    Young at hort

    Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
    Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

    Beyond a joke

    Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
    The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

    The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

    Sadly though, the Lawrence of Arabia star is not around to lend his own critique
    Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

    A wild night out

    Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
    Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

    Comic Sans for Cancer exhibition

    It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
    Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

    Besiktas vs Arsenal

    Five things we learnt from the Champions League first-leg tie
    Rory McIlroy a smash hit on the US talk show circuit

    Rory McIlroy a smash hit on the US talk show circuit

    As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
    Boy racer Max Verstappen stays relaxed over step up to Formula One

    Boy racer Max Verstappen stays relaxed over step up to F1

    The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
    Fear brings the enemies of Isis together at last

    Fear brings the enemies of Isis together at last

    But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
    Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

    Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

    Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment