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Abbey multi chief warns of bond risk

Abbey head of multi-manager John Kelly has warned investors about the dangers of junk bonds.

Kelly thinks investors should be on the alert for problems that could create a downturn in bonds and thinks that the economic climate needs to find a difficult equilibrium.

He describes this as a Goldilocks scenario – where growth needs to neither be too hot nor too cold. If growth is too strong, companies spend to expand and gear balance sheets and this should sound a warning to bond investors.

If growth is too weak, then servicing debt becomes too much for some and defaults will rise.

The last bull market in low-quality bonds burst when Russia defaulted on loan payments in 1998.

Kelly says: “In the panic that followed this, investors rushed for safety and it was only at this point that it was recognised just how similar the bets being taken were. When the rush came for the door, few could get through and many were financially burdened.

“It is easy to speculate but the chances are that any new problems that arise will be unanticipated and the shock will be all the greater.”

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