Decent returns eyed from corporate bonds

3rd November 2010

Adam Cordery, head of European & UK credit strategies at Schroders, for one, is reckoning on a return from corporates of between 1% and 5% over the next 12 months: "For me, that would be a great return to achieve for either an investment grade or a high yield corporate bond fund over the time period.

"Mind you, one client last week said that this 1-5% outlook made me a bear ! I am actually bullish on corporate credit spreads, but bearish on government bond yields."

Expect volatility

Breaking down his expectations of a 1-5% return from corporate bonds, Cordery says it would "probably' entail an outperformance of cash, assuming LIBOR rates rise through 2011 and double by year end. He adds: "If we do see 1-5% from corporates over the next 12 months, it will be a very noisy outperformance of cash, with corporate bonds likely to be up or down versus cash by quite a lot in any given month."

Certainly a 1-5% performance from corporate bonds would be "highly likely" to deliver more than government bonds, which will fall in price if, as widely being expected now, gilt and bunds begin deflating.

Bond economics

Turning to macroeconomic and monetary policy matters impacting on bonds and fixed income instruments in general, Cordery firstly points out that, historically, policymakers tend to resist increasing rates until unemployment is firmly on a downward trend: " Initially, after a recession, the recovery is jobless; layoffs decline so unemployment stops going up, but it takes a bit longer for hiring to start again."

The UK coalition government is being lauded for their bold budget cuts but for Cordery, the detail is more interesting than the headlines. "The big numbers being quoted for the cuts all seem to be in real terms, that is after adjusting for inflation and/or against current projected spending, rather than against government spending today."

When cuts are not cuts

He notes that the FT's Lex column pointed out on 21 October that UK government spending will still actually rise by 5% over the next 3 years.

An MindfulMoney article here explains the relationship between rates and bonds while a BBC report here looks at the government's recent spending review and details the cuts announced.

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