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Corporate bonds – still fair value?

The corporate bond sector swallowed £338m in August, enjoying its tenth consecutive month as top selling sector – but has credit run its course?

Schroders equity income co-fund manager Nick Purves believes a drop in corporate bond yields and increased risk appetite has made the sector less attractive.

He says: “Generally we don’t think they are (as attractive). What we are trying to do is buy corporate bond-type risk offering equity-type returns, so double digit returns. At the beginning of the year you were able to do that, I think it is fair to say that option is no longer available to you given that risk appetite has increased quite a lot and also an enormous amount of money has gone into corporate bond funds and that has pushed yields down across the board.”

But M&G corporate bond fund manager Richard Woolnough says although credit no longer represents the “once in a lifetime opportunity” it did earlier this year, it still looks relatively cheap and investment grade bonds still represent good value.

He says the technical picture also looks supportive with narrowed credit spreads despite record issuance and investment grade bond spreads have tightened to levels consistent with a ‘typical’ recession.

He says: “Although government bond issuance is set to accelerate, activity within the corporate primary market looks set to decline – all of which is supportive of further spread tightening.”

Despite absolute undervaluation gone in the sector following such a strong rally advisers remain warm to corporate bonds dubbing them “fair value.”

Skerritt Consultants head of investments Andrew Merricks says: “Obviously we’re past the main kick in them now but we’re still holding them pretty comfortably. Compared to cash it’s a good yield and for people looking for income, there’s not a lot more out there.”

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