Is this the right time and the right price to invest in corporate bonds?

We have no crystal ball and we cannot guarantee that this is the best time to buy fixed interest. The wrong combination of inflation and corporate worries might create a poor environment for corporate bonds. So why do we think investors should buy corporate bonds now?

Most commentators predict that interest rates are going to decline even if there is a small amount of inflation. The need to avert a recession and bail out the huge number of people with onerous mortgages will put downward pressure on interest rates. Fixed interest markets can react quite quickly when sentiment changes. In this scenario it is likely you will see some capital growth in bonds and addition to a healthy level of income.

To us all the signals indicate that it could be the best time to invest in fixed interest in almost 10 years. The last time bonds were this attractively valued was the turn of the millennium. Today, yields are at a similar level to February 2000 but valuations are even lower. This means investors who act now have the opportunity to benefit from these income levels and if valuations rise there is also some potential for capital growth.

The other signal making bonds hard to ignore is what is known as the spread - essentially the difference in yield compared to government bonds (gilts). Historically corporate bonds typically yield 0.5%-1.5% more than government bonds. This is to compensate you for the extra risk of lending money to companies where there is always the risk of default. Today corporate bonds are yielding 2% more than gilts, a sign to me that the bond prices have fallen too far.

In my view all investors should at least look at them. Bonds are generally viewed as the asset class of choice for income investors. However, I believe we are faced with a very unusual situation in bond markets. Indeed as one veteran bond manager recently put it: 'There may not be an opportunity like this for another 20 years.' Valuations are so low and yields so attractive I genuinely feel both growth and income investors should be considering corporate bonds.

Mark Dampier
Head of Research