Value left in corporate bonds, says M&G’s Woolnough

Corporate bonds continue to offer value for investors, says Richard Woolnough, manager of the £4.6 billion M&G Corporate Bond Fund.

Rejecting claims by some investors of a "bond bubble", Richard says credit is still priced for a recessionary scenario. "I still like investment grade corporate bonds as investors are getting paid well for taking on credit risk. Spreads have come a long way since the crisis, yet they remain high. The yield curve is also steep, so you are getting paid an attractive yield to take the duration risk."

Richard believes that parts of the high yield market are also attractive, particularly BB and B rated names, where many issuers' fundamentals remain sound but the bonds are offering a substantial premium to some higher rated names.

Richard adds that corporate bonds continue to look attractive relative to the merits of cash because the combination of very low interest rates and current rates of inflation mean that the returns on a deposit account are negative in real terms.

However, due to his belief that economic growth is likely to be lacklustre in the coming quarters, he has been selling some corporates that have become expensive and has added slightly to his government bond position.

No threat from inflation

Richard does not believe that inflation is likely to pose a threat in the near term. The output gaps in many developed nations - the difference between the possible and the actual economic output of a country - are unlikely to close for some time, and even with rates above target, the Bank of England is currently prevented from hiking due to the weak economy.

Supportive factors

Besides the fundamental attractions of the market, a number of other factors are supportive of bond prices. First, the default rate for corporate bonds peaked at the end of 2009 and has declined sharply since. Investors can be more confident about collecting their coupons.

Second, while governments continue to issue bonds to shore up their finances, issuance of corporate bonds is declining. So relative to government bonds, the supply of corporate bonds is falling, helping them to be comparatively more attractive.