Although the best gains are probably in the bag, the short-term outlook for the sector remains benign
Bubbles...we can't live with 'em and we can't live without 'em. Investors have got so used to them, they need all the anxiety and excitement as the latest bubble inflates, deflates, pops or explodes. There is no such thing as a rally any longer, or even a boom. It has got to be a bubble.
So, by all accounts, we are in a corporate bond bubble. Or am I too late? Has the bubble burst? Can thousands of wisely-advised retail investors be wrong? The latest year-on-year figures from the Investment Management Association (IMA) show that one quarter of all new money flowing into unit trusts and Oeics in the UK was destined for corporate bond funds.
It has been quite a while since the launch of a corporate bond fund, perhaps because there are already some 200 sterling funds around to choose from. That's not counting the funds that are honest enough to say they are investing mostly or exclusively in high-yield stuff.
The IMA data was a bit of a wake-up call. As I recall, I bought a boring bunch of investment-grade bonds a couple of years ago because there was a little spare cash around from the cancellation of my golf club membership (I got tired of having to sit in the clubhouse and hear the collective moaning of downsized middle managers) and, frankly, the stock market alternative was not exactly tempting.
They were an almost forgotten investment until just before Christmas, when my godson 'reappeared in my life', as they say in the tabloids. He had rashly abandoned his ruinously expensive public school, which appears to have had little impact on his unpredictable behaviour, to claim a job from his spiritual mentor. I found him something as far away as I could, but he bounced back selling junk bonds.
I had to trade just to get rid of him and I'm actually glad I did, as they are up 25% already this year. A review of the my earlier purchases, though, reveals that total return from these investment-grade stalwarts has slid from 12% in 2001 to just over 4% last year.
As it turns out, 2000 was an excellent time to invest in corporate bonds but, according to the IMA, just 4% of retail investors decided to do so. It is the same old story: they didn't want the stock market then, when it was 40% cheaper, and now corporate bonds spreads have halved, they are getting interested. Buy high, sell low ' is there ever a better contra-indicator than retail sales?
However, I don't see a bubble. The best gains are probably in the bag, but the short-term outlook is benign. Falling interest rates have supported bond investors but there is no prospect of sharp rises in the near future. If economic growth is gathering pace, that should underpin the market. Companies had a couple of bruising years but look all the better for it. Defaults should ease.
Institutional investors have been thinking about higher bond weightings in their portfolios for some time, but low bond yields and pitiful equity markets have hardly encouraged a switch. Now both asset classes have moderated, they might act, and the market is not going to collapse with that kind of buying power behind it.
I'm getting paid three times over the odds for owning corporate debt, instead of four times. I can live with that, especially as equities could still surprise on the downside.
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