Fixed income outlook is “complicated”

Portfolio allocationHigh yield bonds are tipped to be a valuable portfolio addition in 2015, provided the risks are understood.

David Stubbs and Kerry Craig, global market strategists at JP Morgan Asset Management, say the outlook for fixed income in the coming year is complicated.

“It is critical for investors to remember that when interest rates rise, bond prices fall. Although a rate rise may not be imminent, rates will eventually have to move higher,” they write in an outlook report.

Stubbs and Craig add that because different areas of the bond market will respond differently to rising interest rates some will be more attractive than others, with high yield bonds proving more resilient than longer maturity government bonds, for example.

At Source Investment Management Paul Jackson, managing director and head of multi-asset research, says that high yield will provide a good alternative to sovereign bonds in the coming year as yields may fall in the short term. He also tips equities, real estate and emerging market debt as useful to own.

Back at JP Morgan Asset Management, Iain Stealey, manager of the Global Bond Opportunities fund, cites high yield debt as an option for enhancing return potential, saying that it has “provided some of the best yields over the last decade”. Stealey adds that, with interest rate rises on the horizon, less rate-sensitive segments, such as high yield bonds, could be beneficial, as their higher coupon may offset capital losses.

For Robeco, high-yield bonds remain an attractive asset category, but the firms warns that this risky asset class requires vigilance as the US central bank, the Federal Reserve, starts its tightening cycle and “liquidity risk is not fully reflected in the market”.

Michael Scott, fund manager at Schroders, says the firm prefers sterling high yield to US because the US is more advanced in the credit cycle following quantitative easing.

He also points out that around 70% of the US high yield market is energy firms that have borrowed money to invest in shale and other similar projects, which could be negatively affected if oil prices continue to fall.

Earlier this month, a poll from Aon Hewitt’s Fund Manager Conference told a difference story for high yield, with almost half of the fund managers surveyed expecting that investment-grade and high-yield credit would deliver the weakest returns during 2015.

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