14th July 2016 by Darius McDermott
If you’re a risk averse investor chasing income in today’s neverendingly-low interest rate environment, your hunt just got a little bit harder. In the days following the Brexit vote, yields on 10-year UK government bonds (gilts) fell below 1% for the first time in their history1.
Yields on 10-year US bonds also went lower, down from 1.74% the day before the referendum to 1.4% at time of writing2. Pre a Leave outcome, interest rates in the US were predicted to rise again over the summer. Not so any more.
Then you’ve got all those countries whose government bond yields are already in negative territory, like Japan, Germany and Switzerland. So your investment is effectively losing you money.
With this backdrop in mind, European corporate, or company, bonds could be a potential bright spot in the fixed income space. Corporate bonds pay a higher rate of interest than their government counterparts and the European Central Bank (ECB) began its corporate bond buying program last month. This appears to be supporting the asset class despite Brexit-related challenges in other areas of European markets.
Those who are familiar with fixed income machinations may at this stage protest that this buying from the ECB will push up bond prices, thereby causing yields to fall. That may be true, but investors can still get a yield of between 5% and 6% from a good strategic bond fund (which may invest in a mix of government, corporate and emerging market bonds). Considering all current options, this seems to me like fair compensation for the extra risk inherent in moving away from government bonds.
Two Elite Rated funds that are particularly well positioned to benefit from European corporate bonds are the Invesco Perpetual Monthly Income Plus and the MI TwentyFour Dynamic Bond. Last month Gary Kirk, manager of the TwentyFour fund, said he had been actively targeting as much euro-denominated issues as possible.
In an update following the Brexit decision, Invesco Perpetual’s head of fixed income products, Lewis Aubrey-Johnson, said corporate bonds that were eligible for purchase under the ECB’s buying program held up well in the initial few days of volatility.
Concerns around the potential break-up of the European Union and a swathe of national elections to come in 2016 and 2017 have put fledgling economic growth forecasts under pressure. But, if anything, these worries have caused many to predict the burden of propping up growth will therefore continue to fall on the ECB’s shoulders, making ongoing bond purchases more likely.
Managers on the Invesco Perpetual Monthly Income Plus fund noted corporate bond issuance had soared in the month of June as a direct result of the program. So investors may see new opportunities coming to market in the next few months. The Elite Rated Jupiter Strategic Bond also allocates just under 20% of its portfolio to Europe.
1Bloomberg data, UK 10-year government bond yields, 24/06/2016
2CNBC data, US 10-year government bond yields, 23/06/2016–11/07/2016