Corporate Bond outlook

Citywire Wealth is this week reporting an outlook for corporate bonds which suggests limited upside potential and the chance of a significant capital loss.

The outlook comes from Ignis Asset Management head of credit Chris Bowie who sees the risk of a 40% capital loss should real gilt yields adjust.

Even though he believes corporate bonds are currently trading very cheaply, he is prepared for a correction.

Giving the example of sterling investors in US-firm Citigroup, Bowie describes the yield difference of 290 basis points between a three year and 26-year bond, rewarding investors for additional risk.

Whilst the rewards for taking risks appear to exist for corporate bond investors, Bowie questions whether it is worth these rewards and concludes it is not.

Because history shows that below inflation yields on gilts are not sustainable, an upwards adjustment in yields could hit fixed income hard.

In keeping with the moves made by other corporate bond fund managers, Bowie has more defensively positioned his fund and reduced duration risk, reducing exposure to longer-dated bonds.

As we updated our Investment Outlook this week for the third quarter of 2012, we will be carefully considering the outlook for fixed interest and taking these views into consideration.

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