He says: “We would still very much encourage investors to ensure that they have sufficient duration exposure in portfolios. Accepting bonds rallied into the end of last year, as central banks begin to cut rates later this year bond yields should move lower. This means owning more government bonds in general, or potentially buying bonds with longer maturities, which have increased sensitivity to the change in interest rates.
"Finding value in credit is a little more challenging; investment-grade bonds are expensive and the high-yield market in general is even more richly priced.
"An area of the market that we believe to be interesting is Brazilian government bonds; local inflation fell significantly last year and investors are able to achieve one of the highest real yields available in the market at around 6 per cent. Expectations of interest rate cuts by the central bank and stability in the local currency provide further support to the position.”
Jupiter’s head of fixed income Matthew Morgan takes the view that while there are likely to be opportunities for investors seeking higher returns by taking on additional credit risk, the key to returns there may be to avoid the companies that, even if they can pay the coupon on their borrowing now, may not be able to when they have to refinance the debt in the coming years, as the new interest rate will be higher.
Rathbones fixed income fund manager Stuart Chilvers says he sees plenty of value in government bonds. He says yields have reached a level whereby even if there were to be a sell off, for example because inflation proves to be more persistent than is currently expected, then the level of income an investor can collect compensates for some capital losses resulting from a price fall.
St James's Place head of fixed income Frédéric Taché says there is value in emerging market bonds.
Many of those economies have already begun to cut interest rates, which may mean the economies in question grow more quickly than those in developed markets that have yet to cut rates.
From an investor's perspective, the fact that the trajectory and timing of rate movements is already established in many emerging markets means the duration risk question is less relevant.
And if the US does cut rates, the normal expectation is that this would lead to relative weakness for the dollar as a currency, which usually boosts the returns for emerging market assets as those are higher risk, while the dollar is often viewed as a safe-haven asset,
So lower returns from dollar-denominated assets typically leads investors to risker assets.
Taché says the idiosyncratic nature of those markets means one needs to use a specialist bond fund to access them, rather than a generalist or passive instrument.
