Bond funds stable in 2014, Moody’s predicts

Bond indicesMoody's predicts that investors' bond fund allocations will stay mainly as they are and that large outflows, such as those seen in the second half of 2013 amid tapering fears, will not be repeated in 2014.

In a bond market and closed-ended fund report, the ratings agency says the outlook for the global bond fund sector in 2014 is stable, as corporate default rates remain low, refinancing risks diminish, and companies keep healthy liquidity profiles.

In its report, called 2014 Outlook – bond funds, Moody’s says investors will continue to rely on fixed income investments to provide reliable income and steady returns, even in the face of higher interest rates.

Support for bond funds from pension funds that have in recent years increased their allocations to bonds at the expense of equities, will remain as these shifts will not be reversed quickly.

Also, corporate borrowers, particularly those in the high-yield sector, will continue to shift their funding to capital markets given relatively low interest rates, reduced bank lending capacity and growing capital markets, particularly outside the US, Moody’s expects.

However, bond funds’ investment strategies – which are focused on credit selection within active and flexible mandates as managers move towards higher risk strategies – will gain in importance as rates rise. Fund managers are constructing strategies and products that will result in positive total returns in a rising interest rate environment.

"Investors will continue to rely on fixed-income investments to provide reliable income and steady returns, even in the face of higher interest rates," says Yaron Ernst, Moody's managing director in the managed investments group.

Moody's expects bond markets to also show some volatility, as events such as the US debt ceiling is reached again in February, and around the European Central Bank's Asset Quality Review of large European banks.

But after several turbulent years, Moody’s says, global sovereign creditworthiness is likely to be comparatively stable this year, helping to support the stable outlook on bond funds.

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