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Safety stays an obsession with quality bonds

Credit Suisse Asset Management says the market&#39s view that many

high-yield bonds will be imminently re-rated is wrong but says

obsession with safety is likely to persist.

Kevin Adams, manager of CSAM&#39s corporate bond monthly income fund,

says that, despite widespread views to the contrary, the market&#39s

fixation with safety will continue as economic fundamentals in the UK

show no sign of improving.

Adams believes quality investment-grade bonds will remain a safe

haven for investors, with the high default risk among lower-grade

bonds outweighing the potential rewards of higher yields.

Although fraud continues to be a problem for fund managers in this

area, he says that a diversified portfolio should limit any damage to

funds.

Adams believes there are signs that companies are repairing balance

sheets, reducing debt, capital expenditure and capacity. He says if

the strides taken in this respect in the telecoms sector spread

throughout the corporate sector, then risks to bondholders will fall

and corporate bonds will continue to perform.

Default rates also appear to have peaked, he says, although the

outlook is for a slow fall in corporate bankruptcy. Nevertheless, he

says there is more to performance than investing in investment-grade

bonds.

He says: “Sticking with quality will not be sufficient to win the

performance game; avoiding the disasters in the corporate bond market

is also likely to continue to be one of the primary determinants of

good performance.”

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