By ROBERT HARLEY 25/04/2008
As the credit crisis has unravelled, the risk premium (or spread over gilts) that investors demand for buying quality corporate bonds has risen dramatically to touch all time highs. In the main this has been driven by concerns over the state of health of the bank balance sheets and the prospect of further asset write downs and bad loan provisions. For existing investors this has been a painful experience, characterised by capital losses; however, we firmly believe the sector is now in a strong position, not only from an absolute value perspective, but also relative to other asset classes. For low quality or higher yielding bonds, the investment case is slightly less compelling, but none the less this asset class is also starting to offer attractive risk reward credentials relative to equities. Interestingly what has surprised a number of investment professionals is the relative strength of equities, given the on-going turmoil in global credit markets. Whether the recent action taken by central banks is sufficient to break the current impasse and re-invigorate growth in the western economies remains to be seen, in the meantime bond markets are already pricing in a more negative outcome.
Source: JP Morgan
Source: JP Morgan
Our recommendations for investors seeking exposure to quality UK corporate bonds include Fidelity Moneybuilder Income, Invesco Perpetual, Royal London and Old Mutual Corporate Bond Funds.