Mark Dampier: Corporate, high-risk, strategic, high yield ... the word is bonds


It is possible to trace the bond market's strong run as far back as the early 1980s, when US interest rates peaked. We have since seen a long period of falling bond yields (and rising prices), though it has not always been a smooth ride.

The past five years have been particularly strong as interest rates were cut aggressively in response to the financial crisis. Investors' insatiable appetite for income and the gradual realisation that rates were not going back up to 5 per cent increased bonds' popularity. This demand has driven yields down (and prices up).

At the time of writing, European high-yield bonds yield less than 4 per cent on average, an all-time low which barely compensates investors for the risks.

The positive case for bonds at these levels relies on a low-inflation, low-interest rate world where the economy continues to recuperate (without growth running away). An improving economy helps companies to strengthen and allows them to reposition and rebalance. If this transpires, corporate bond investors receive a modest yield and remain happy.

For the moment, inflation remains below the Bank of England's 2 per cent target, and the interest rate outlook remains relatively benign.

Some commentators believe rate rises could come as early as November. In my view, interest rates will not rise until after next May's general election and, while this is by no means certain, I still feel it is the most likely outcome.

Furthermore, while the media obsesses over the timing of the first move in interest rates, their eventual path is far more important. On this the Bank of England has been quite clear: when rates do start to rise, they will do so slowly, in small increments, and they will eventually stabilise at much lower levels than we saw pre-crisis.

Rising interest rates and inflation are not the only risks. High-yield bonds, in particular, are sensitive to economic conditions. At current yields and prices, any slight deterioration could cause a sharp fall in the bond market.

I don't believe there is cause for panic, but it is sensible to periodically review your overall exposure to bonds and the types of fund held to ensure they continue to meet your objectives.

In the current environment, I favour strategic bond funds which can invest across the fixed-interest spectrum, from government and corporate bonds to higher-risk high- yield bonds. They also have the ability to invest overseas, potentially benefiting from currency movements, while derivatives can also be used to profit from price falls.

I recently caught up with Ariel Bezalel, manager of the Jupiter Strategic Bond fund. Interestingly, while many commentators are increasingly cautious in their outlook for high-yield bonds, Mr Bezalel doesn't yet see "the death of high yield". Around two thirds of the fund is invested in high-yield debt, which includes 25 per cent in subordinated bank debt (these bonds rank lower in the pecking order if a bank defaults on its debt).

Around two thirds of this high-yield bond exposure is invested in bonds secured against specific assets, such as property or oil rigs. These bonds can offer attractive yields, but in the event of default the bondholders have a claim over the assets, which they could sell to recover some losses.

Mr Bezalel is aware that bond yields are likely to drift higher over time, but he does not anticipate a 1994-style scenario, especially as interest rates are unlikely to move too high, too fast.

To mitigate some of the impact of rising interest rates, the fund's duration (sensitivity to interest rate rises) is 2.2, compared with 7.7 for the Markit iBoxx Sterling Corporates Index. The portfolio's lower duration is achieved by using its flexibility to invest in derivatives. For instance, the fund is currently short US Treasuries which, while reducing duration, could also prove profitable if US government bond yields rise, and prices fall.

The fund currently yields 6 per cent and also has the potential to offer some protection when interest rates rise. This does, however, rely on the manager making the right calls, and if he gets it wrong, greater volatility should be expected.

Overall, I believe that it is increasingly important for bond fund investors to focus on flexible funds with experienced managers at the helm and I continue to rate Ariel Bezalel highly.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit

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

Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
Life and Style
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
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

    Ashdown Group: Business Analyst - Financial Services - City, London

    £50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

    SThree: Trainee Recruitment Consultant

    £18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

    Recruitment Genius: Administrator - IFA Based

    £22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...

    Day In a Page

    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
    Public relations as 'art'? Surely not

    Confessions of a former PR man

    The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
    Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

    Bill Granger's luxurious sweet treats

    Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
    London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

    The mother of all goodbyes

    Paula Radcliffe's farewell to the London Marathon will be a family affair
    Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

    Steven Naismith: 'We know we must do better'

    The Everton forward explains the reasons behind club's decline this season
    Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

    Michael Calvin's Last Word

    Praise to Wenger for having the courage of his convictions