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Potter warns of bond bubble

Thames River Capital’s Gary Potter has warned that recent investor moves into corporate bonds have all the hallmarks of the commercial property and commodity bubbles.

Multi-manager co-head Potter is concerned by the number of investors switching out of cash and into corporate bonds in search of higher returns.

He says: “I can see the argument that cash yields are very low and corporate bond yields are quite high but I am not completely convinced. It worries me that clients are being encouraged out of cash and piling into corporates as it is one hell of a different asset class and there are still significant risks of capital destruction.

“This has all the hallmarks of people piling into property two years ago then piling into commodities in May last year. It is almost such an obvious trade that it rarely goes the same way as expected.”

Jupiter head of independent funds John Chatfeild-Roberts has also cautioned on corporate bond funds with a heavy financials’ weighting, particularly lower-quality bank debt.

Fidelity International fixed income product manager Curtis Evans says: “We think credit does offer substantial value and is certainly not showing signs of a bubble. What is in the price of corporate bonds is something of a depression and you get ample compensation for both default risk and risk of a rating downgrade.”

Premier Wealth Management managing director Adrian Shandley says: “I do not think that corporate bonds should be singled out as absolutely everything has the hallmarks of a nightmare waiting to happen.”

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