Mark Dampier: They say the only way is down but some bonds are yielding to no one

 

Forecasters have called the top of the bond market on numerous occasions over the past two years, but gilts have resolutely not behaved in the way in which many bond fund managers expected. Today, 10-year gilts are yielding  1.9 per cent. Yields may have touched a low of 1.4 per cent last summer, but in reality they have settled in a tight trading range.

Those who have shorted gilts in anticipation that prices will eventually fall have thus far suffered the consequences. Betting against central banks is seldom a good policy; as liquidity has continued to be pumped into the markets via quantitative easing (QE), gilt prices have remained stubbornly high.

By historic standards, bonds are expensive. It is not inconceivable that prices will remain elevated for some time yet. We are living in a very different world, for the time being at least, where a continuation of ultra-low interest rates is forcing investors to hunt for yield in all sorts of asset classes. An extension of the Bank of England’s Funding for Lending Scheme means banks don’t require our deposits, driving interest rates lower – with every likelihood they could fall further. Against this backdrop, it is not surprising that gilts have not seen a dramatic yield rise.

Aside from gilts, all areas of fixed interest are in demand. This includes more risky high-yield bonds, which have been touching on levels not seen historically. This does not mean value can no longer be unearthed in this area of the market, but care does need to be taken. It is for this reason that I prefer to invest with an experienced bond fund manager, who can make the decisions for me.

Eric Holt, manager of the Royal London Sterling Extra Yield Bond Fund, acknowledges the dangers but is still finding plenty of opportunity. While Mr Holt views the gilt market as expensive, he does not expect its direction to change any time soon, believing there is potential for further QE in the future. In an environment of low growth, low interest rates and relatively low inflation, this is exactly the type of environment in which bonds could do well.

At present, Mr Holt’s fund has  42 per cent invested in high-yield bonds, with a further 35 per cent in unrated bonds. Unrated bonds are issued by companies that haven’t paid an agency for a credit rating; Mr Holt prefers to do his own research into a company’s strength rather than relying on ratings agencies. Many of those held in the portfolio are collateralised bonds, secured against the assets of the company issuing them. Being unrated, these bonds also tend to offer a better rate of interest.

The Royal London Sterling Extra Yield Bond Fund currently offers a running yield of 6.15 per cent, which is tax free in an individual savings account or self-invested personal pension (Sipp), and dividends are paid quarterly. Investors must bear in mind that this fund should not be considered low risk simply because it has the word “bond” in it – a common misconception. Indeed, the fund was severely hit, at least in terms of its capital value, during the credit crisis in 2008. Mr Holt, however, held his nerve and the fund has since doubled in value.

He has recently purchased seven- year mortgage debentures issued by Alpha Plus Holdings, yielding an attractive 5.75 per cent. The bond is secured on property, in this case London private schools.  Mr Holt has also bought bonds issued by Annington Finance, which are secured on Ministry of Defence accommodation. Mr Holt recognises that liquidity for these bonds is low, but at a yield of 10 per cent, he feels he is being appropriately compensated for the risk taken.

The best bond returns are likely to be behind us, but Mr Holt is confident he can deliver attractive total returns from a combination of both income and capital growth. A large part of my own Sipp is invested in this fund, enjoying the benefits of tax-free income. In my opinion, interest rates are unlikely to rise any time soon. As the search for yield continues to gather momentum, I am happy to hold this fund until the facts change.

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 www.hl.co.uk/independent

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
Finacial products from our partners
Property search

Retirement

 

Mortgages

Fee-free, expert mortgage advice:

  • Find the right mortgage for you
  • Latest best-buy deals
  • Mortgage calculators
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Telesales Executive - OTE £25,000

    £13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...

    Ashdown Group: Graduate Developer (Trainee) - City, London

    £25000 per annum + benefits: Ashdown Group: A large financial services company...

    Ashdown Group: Marketing Assistant - Financial Services Sector - London

    £20400 per annum: Ashdown Group: An established and highly reputable organisat...

    Day In a Page

    The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

    The Silk Roads that trace civilisation

    Long before the West rose to power, Asian pathways were connecting peoples and places
    House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

    The honours that shame Britain

    Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
    When it comes to street harassment, we need to talk about race

    'When it comes to street harassment, we need to talk about race'

    Why are black men living the stereotypes and why are we letting them get away with it?
    International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

    International Tap Festival comes to the UK

    Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
    War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

    Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

    Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
    Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

    'A subversive brothel keeper and Communist'

    Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
    Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

    BBC heads to the Californian coast

    The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
    Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

    Victorian fraudster who shook the Bank of England

    Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
    Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

    Car hacking scandal

    Security designed to stop thieves hot-wiring almost every modern motor has been cracked
    10 best placemats

    Take your seat: 10 best placemats

    Protect your table and dine in style with a bold new accessory
    Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

    Cook not the only one to be caught in The Oval mindwarp

    Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
    Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

    Can Benitez get the best out of Bale?

    Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
    Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

    Beijing witnesses new stage in the Jess and Kat rivalry

    The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
    Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

    Jeremy Corbyn interview: A shrewd operator desperate for power

    His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
    Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

    Isis executes Palmyra antiquities chief

    Robert Fisk on the defender of the ancient city's past who was killed for protecting its future