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Sell-off sees bonds bounce back

Sell-offs in the corporate bond market are providing investment opportunities in the financials sector, says PSigma Investment Management.

The firm says that financial bonds are now attractive, especially on a yield or risk-adjusted basis, with some bonds yielding 9 to 10 per cent.

A year ago, the spread was 75 basis points over Libor but PSigma says in many cases it is now over 300 basis points.

It says action by central banks, recapitalisations and dividend cuts are all proving positive for bank bonds. It considers that long-term capital-raising by banks might be negative for equity holders in the long term but these act as a “real positive” for bondholders.

Investment strategy director Thomas Becket says: “Corporate bonds have been sold off heavily over the last nine months as the outlook for specific companies and the general macro backdrop have deteriorated and investors have fled riskier assets for safe havens such as gold and sovereign bond markets.

“High-yield bonds are rightly perceived to be a higher-risk investment, as the yields available should reflect. However, by this time last year, the yields on offer from investments in this space were implying an extraordinarily benign economic backdrop, generally yielding on average about 75 basis points above treasuries and gilts.”

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