After years in the wilderness, corporate bond funds are starting to make gains. The higher-yielding funds in particular could rise by 15-20 per cent each year for the next two years.
These bonds are trading at extraordinary distressed prices at around historic lows. The market is pricing in a scenario where nearly half of all high-grade companies will go bust in the next five years. This is 10 times the amount of investment-grade companies that went bust during the five years of the Great Depression of the 1930s.
In addition to high yields, many of the bonds in which the higher-yielding corporate bond funds are invested are standing under par, which means that at maturity date these will be repaid at the full value, so making capital returns as well.
Some of the higher-income bonds I like with yields of up to 10 per cent include the Baillie Gifford high-yield bond fund, Invesco Perpetual monthly income, Investec monthly high income, Henderson strategic bond income and Standard Life higher income. All these bond funds have outperformed in difficult circumstances and have highly experienced managers. They have avoided most major defaults.
Emerging market bond funds are also attractive, with many companies being upgraded by rating agencies. I like the Threadneedle emerging market bond fund as well as those managed by Investec, M&G and Henderson although their yields are much lower. Income investors would be sensible to stick to the high-yield bond funds.