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Julian Gibbs

The average UK corporate bond fund now yields 4.1 per cent while the average UK equity income fund yields 4.5 per cent and has much more scope for capital appreciation at current levels.

I believe investment-grade corporate bond funds are much overpriced and are dangerous investments at present because the Government is issuing over £47bn of gilts this fiscal year – 80 per cent up on last year. This oversupply is likely to lead to lower gilt prices.

Investment-grade bonds move in line with gilts and are certain to fall, too. The other major factor is that when bonds are downgraded, as often happens, their prices fall heavily. On the other hand, high-yield bond funds move more in line with equities and, therefore, have much more scope for capital growth as well as having a high income.

The default rate, currently at around 13 per cent, looks as if it has now peaked and looks likely to fall. Well-managed funds usually avoid most of the defaults. Last time the default rate peaked in the early 1990s, high-yielding corporate bonds rose by 40 per cent in that year, with double-digit returns in the following two years.

While it would be foolish to assume that the same returns will be achieved this time, returns of half that amount are certainly on the cards.

The funds I like best are Invesco Perpetual monthly income plus, which also has a small exposure to equities and yields around 9 per cent, Threadneedle high-yield bond (9.1 per cent), Legal & General high income (7.9 per cent), Standard Life higher-income retail (7.6 per cent) and New Star extra high-yield bond (7.8 per cent).

It is wise to invest this year&#39s Isa money in one of these bond funds as delaying could mean that investors miss out on a lot of capital appreciation.

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