The Analyst: Why it's time to get back into bonds

As I write, the UK stock market is approaching the lows it reached back in March. The economic news continues to be poor and, given that the housing market seems set to continue to fall, I can't see the news getting better any time soon. House builders have been slaughtered, despite the fact that they have enjoyed a 10-year bull market.

The trouble is that this will feed all the way through the supply chain. It doesn't only affect the construction workers, but also industries from furniture makers to removal firms. A falling housing market has profound implications for the UK economy.

In a normal downturn, you would expect interest rates to fall to help boost the economy. However, the Bank of England's remit of a 2 per cent inflation target is stopping them doing this for the time being. That said, interest rates have effectively been going up anyway for those who have got a mortgage; those remortgaging are finding that the real cost of borrowing is much higher than the base rate would imply.

Despite this doom and gloom there are opportunities in both equities and bonds. This week, I want to concentrate on bonds, specifically the Old Mutual Corporate Bond Fund managed by Stephen Snowden. Bonds have also been punished because of rising inflationary expectations. The Old Mutual fund invests in investment-grade corporate bonds, which are borrowings from companies rather than governments. Not only have these suffered on the back of inflationary expectations, but also because of the credit crunch.

Financial institutions have been forced to sell bonds in order to raise cash for their balance sheets. As with any market that has forced sellers, bargains start to appear quite quickly, as those desperate to sell have to take whatever price they can get. This has probably thrown up one of the best opportunities to buy bonds for many, many years. Indeed, Stephen Snowden reckons that if you don't buy them now you never will. He believes (rightly, in my opinion) that the fall-off in demand that we are experiencing in the UK, the US and the rest of western Europe will in itself lead to low inflation later.

Remember that filling up your car, buying food, and paying the utility bills is all sucking money out of your pockets. Because of this, I feel that, in a strange way, these rising prices are actually deflationary.

In other words, they mean we have less money to spend in the shops and this should keep prices for all non-food and non-energy purchases low. This would give the Bank of England an opportunity to reduce base rates. Ideally, these should be much closer to 4 per cent in the current environment instead of their level of 5 per cent.

Compared with the last recession in the early Nineties, this time most workers are not in the position to ask for higher wages. Perhaps the only exception is the public sector, which seems to think it is immune from the economic problems and can hold us all to ransom. Indeed, public sector workers are the enemy at the gate and are as troublesome as trade unionists were in the 1970s.

However, if the Government has the courage to hold the line on wage increases (although courage isn't something politicians are known for) then interest rates are more likely to start falling next year.

Mr Snowden is finding opportunities in the financial sector. He believes that banks have still not revealed the true extent of their losses and feels more horrors will come through. The sooner that happens the better, though, and perhaps by the end of the year everything will have come out of the woodwork. Once that happens, the banks will feel more comfortable about lending to each other, which is something we desperately need to help grease the wheels of the economy.

So where does that leave the fund? It currently has a yield of 7.5 per cent, which looks remarkably good considering the prospect of some capital growth on the underlying bonds, too. I have not been a bond fan for many years, but I really do think there is an opportunity in this asset class and with this fund in particular. Remember, too, that when the fund is held in an ISA or Sipp the income is tax free.

Stephen Snowden is the man who said a few years ago that investors would be better off in cash than bonds in the short term. I doubt Old Mutual's marketing department was very happy about that, but his honesty was proved right then. He is far more bullish now and I believe he will be proved right again.

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

Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Colombia's James Rodriguez celebrates one of his goals during the FIFA World Cup 2014 round of 16 match between Colombia and Uruguay at the Estadio do Maracana in Rio de Janeiro, Brazil
sportColombian World Cup star completes £63m move to Spain
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
Fair trade: the idea of honesty boxes relies on people paying their way
travelIt seems fraught with financial risk, but the policy has its benefits
Antoine Griezmann has started two of France’s four games so far
Life and Style
techYahoo Japan launches service to delete your files and email your relatives when you die
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
Finacial products from our partners
Property search
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

    Programme Director - Conduct Risk - London

    £850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

    Business Analyst (Agile, SDLC, software)

    £45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

    Finance Manager - Bank - Leeds - £300/day

    £250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

    Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

    £100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

    Day In a Page

    Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

    Noel Fielding's 'Luxury Comedy'

    A land of the outright bizarre
    What are the worst 'Word Crimes'?

    What are the worst 'Word Crimes'?

    ‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
    Can Secret Cinema sell 80,000 'Back to the Future' tickets?

    The worst kept secret in cinema

    A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
    Facebook: The new hatched, matched and dispatched

    The new hatched, matched and dispatched

    Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
    Why do we have blood types?

    Are you my type?

    All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
    Honesty box hotels: You decide how much you pay

    Honesty box hotels

    Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Meet the man who doesn't want to go down in history as the country's last Scottish Secretary