Investment grade the ‘sweet spot' for bond investors

Simon Surtees and Karl Bergqwist, Co-Heads of Fixed Income at Gartmore and manager of the Gartmore High Yield Corporate Bond Fund, report finding exceptional value among investment grade bonds for investors prepared to take a medium term (18 to 24 month) view, particularly in the financials sector.

According to Simon and Karl, the risk of defaults in this sector is low relative to the returns that are available.

However, they remain concerned about the prospects for the high yield market, where default rates look set to increase beyond the levels currently priced in by the market.

"The sweet spot currently is in the investment grade market, where there is very good payback given the risks involved. In a complete reversal of where we were at the beginning of 2007. We believe the returns available from investment grade bonds have become attractive," say Karl and Simon.

Both managers are cautious about high yield bonds though, believing them to be vulnerable as the default rate rises. According to Moody's last month, the global default rate is expected to rise to 6.3 per cent over the next year and could reach 10 per cent if the US enters a long recession.

"In the Gartmore High Yield Corporate Bond Fund, we have the flexibility to move a proportion of the portfolio between investment grade and high yield bonds over time and we're using that flexibility. High yield will have its day in the sun, but that's not yet. First, we have got to work through this process of the credit crisis transferring into the real economy."