13th December 2010

M&G - Richard Woolnough: the 2011 outlook for bonds

I can see interest rates staying very low for a long time. In fact, I think that a rise in interest rates is unlikely in 2011, given that the central banks do not want to derail the economic recovery. While I do not expect that there will be a 'double-dip' recession in the UK, Europe or the US, I believe that these economies will 'muddle through' with positive growth that is below its previous trend. This is the sort of environment in which corporate bonds have historically performed well.

Given the low level of interest available on cash, the yields on corporate bonds still look attractive - base rates are just 0.5% but it is possible to buy sterling investment grade corporate bonds yielding 5%. With default rates continuing to fall, investors are still being compensated for taking credit risk. In light of this, I am also comfortable lending to some high yield companies, and this is reflected in my funds having the most high yield they've ever had. Sovereign debt, however, is still a worry for bond investors in some peripheral eurozone countries, and I am avoiding exposure to those areas.

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