Income investors should look at corporate bonds, says Fidelity

As interest rates tumble to 50 year lows and UK banks suspend cash divided payments, the sources of income for investors are dwindling fast. Fidelity International argues that corporate bonds, a market currently yielding nearly 9%, provides an attractive alternative.

Despite unprecedented levels of volatility over the last year, the corporate bond market performed well compared to the equity market, offering high levels of capital protection and income.

Now, historically cheap valuations in many bonds and the fact that fixed income markets are pricing in a full scale depression, not the expected recession, provides investors with an entry point.

Peter Hicks, Head of IFA Channel at Fidelity International, comments, "Income investors face a real quandary at the moment with Bank of England base rates at their lowest level in half a century. Fixed income could be the answer.

"Overall, the Sterling corporate bond market is yielding nearly 9% - and that's after markets have priced in a full blown depression, rather than simply the recession experts anticipate. Our fund managers rightly expect volatility, so a bond fund's yield and capital levels will ebb and flow a little but, with interest rates at 3%, companies now have the best incentive in a long while to borrow money from bond investors which is a positive outlook for fixed income.

"Given that global bank bailouts have given bond holders an extra layer of protection, default risk remains low. Indeed the index that measures the prospect of companies not paying back bond holders in the future has recently plummeted. Our bond fund managers see liquidity as a bigger issue but their cash positions have not affected their ability to offer yields approaching 6% after fees."

Fidelity's bond fund managers use a global research network and a wide range of strategies to ensure that no one idea dominates returns. This has enabled its sterling funds to perform well during the credit crunch and continue offering attractive levels of income.

For example:

MoneyBuilder Income Fund, which is a sterling corporate bond fund, pays a yield of 5.9%;
Sterling Bond Fund, which moves between corporate bonds and UK Government bonds depending on market conditions, pays 5.6%: and
Extra Income Fund, which invests in investment grade and high yield corporate bonds; pays out 7.3%.