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Threadneedle favours corporate bonds

Threadneedle is doubling the proportion of investment-grade corporate bonds held in its European bond fund to 40 per cent.

At present, the fund&#39s exposure to corporate bonds is around 20 per cent. Threadneedle says the move will allow the fund to benefit from increased opportunities in the European non-government market and will raise the yield on the fund.

All the fund&#39s corporate bond holdings will be rated investment-grade by one or more of the credit-rating agencies. The average credit rating of the fund will remain AA.

The fund&#39s reference index will be changed from the JPM European bond index to the Merrill Lynch pan-European large-cap index, which includes a range of corporate and other bonds as well as those issued by European governments.

Threadneedle says the euro has precipitated an expansion in corporate bond markets. It says unifying the individual national markets has made it much easier for companies to raise capital by issuing bonds and non-government bonds now account for 34 per cent of the total fixed-income market.

Threadneedle says it is also responding to increased demand for bonds by investors scared off by falling equity markets. It believes the demand for government bonds means they are relatively fully valued and it sees better value in the corporate sector.

Head of fixed income Robert Stirling says: “We have built up our team of credit analysts in both the investment-grade and high-yield areas to offer the management skills required in this expanding market. With this additional power to invest in a more diversified portfolio, we believe can add to investors&#39 returns.”

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