Bonds are expected to deliver stronger returns this year, with global interest rate rises expec-ted to slow.
Stronger economic growth and higher inflation than anticipated last year held back returns but leading managers are predicting a more benign environment for fixed interest in the next 12 months.
M&G head of retail fixed income Jim Leaviss says the strong economic growth has translated into corporate profit growth and strong balance sheets which are supporting low default rates.
Old Mutual bond fund manager Stephen Snowden is also anticipating a good year for capital appreciation from bonds, with interest rates expected to fall in the US.
He says: “What has been a headwind for bond markets in 2006 will be a tailwind in 2007.”
Leaviss warns that M&A activity, particularly leveraged buyouts, pose a risk because of concerns about the amount of debt being used to fund some deals but Snowden sees opportunities in this area.
Leaviss says: “Lower-rated investment-grade bonds are generally at greater risk of being bought out due to the issuer’s small size. I therefore feel the best value to be had can be found in higher-rated corporate bonds.”
Snowden says: “You can make a lot of money on bonds with good covenants if the company does an LBO but you have to be selective.”