It’s the year of the bond – here’s how to get a slice of the action
Mohadesa Najumi
5 min read
The appeal of corporate bonds may grow as expectations mount around Bank of England rate cuts - TOLGA AKMEN/EPA-EFE/Shutterstock
Many market watchers have been in chorus this year, against a prevailing sentiment backdrop that bonds are back.
In the past 12 months, a steep drop in global bond prices pushed yields to highs not seen since the 2000s.
Goldman Sachs subsequently named 2024 “the year of the bond”, which is a welcome reset for fixed-income aficionados following a dismal 2023.
In the UK, falling gas and electricity prices have driven inflation down to its lowest level (2.3pc) in almost three years and a decline in inflation sets up a great total return for the bond market.
Corporate bonds, which are essentially IOUs issued by companies to investors who receive a fixed rate of interest over a set period of time, are often riskier investments than, say, government bonds, due to the possibility of default.
However, in an environment of falling interest rates, investment-grade corporate bonds issued by financially sound companies with strong credit ratings can provide higher yields compared to gilts.
The Bank of England is preparing for a cut in mid-2025 and the Federal Reserve has signalled a 0.75 percentage point rate cut for next year.
Some may even argue that corporate bonds exhibit resilience in the face of economic uncertainty as they offer a degree of insulation, supported by the underlying strength of the corporate sector.
Macroeconomic turbulence, along with market volatility, can encourage investors to weigh risk against reward more closely and re-evaluate their investment approach.
This has partly led to investors shifting their focus towards safe haven investments, such as corporate bonds, to shield their wealth.
Unlike individual stocks, which may be subject to company-specific risks, corporate bonds could offer a more balanced risk-return profile which in turn enhances portfolio diversification and resilience.
This is because corporate bonds allow you to invest in big companies in a less risky way than buying shares in them. In fact, the global bond market is valued at around $300 trillion (£236 trillion), which is more than twice the value of all the shares in the world.
In addition, corporate bonds are diverse and liquid. While the number of available gilts is limited to the number of governments in existence, there are a plethora of companies to choose from and investment-grade corporate bonds can provide a steady income that allows investors to potentially avoid, or at least offset, the unpredictability of the stock market.
Unlike government bonds, corporate bonds can also be traded on the secondary market.
As central banks embark on a path of monetary easing, with the International Monetary Fund (IMF) predicting that global some central banks will begin cutting interest rates in the second half of the year, the yield differentials between corporate bonds and sovereign debt may widen.
This makes corporate bonds a potentially compelling opportunity for investors.
The key is to exercise selectivity and focus on investment grade corporate bonds from companies with strong finances.
This means choosing bonds issued by companies with robust cash flows and manageable debt levels in order to mitigate credit risk and enhance the likelihood of receiving timely interest payments and principal repayment.
A corporate bond’s credit rating is a judgement of the company’s creditworthiness and the higher the rating, the safer the corporate bond is deemed to be.
If the issuer goes out of business, the investor may never get the promised interest payments or even get their principal back so avoid companies with weak or no credit ratings and remember that prudent investors do their due diligence.
In recent years, there has been an influx of bond issuers that make securities accessible to retail investors so investing in corporate bonds has never been easier.
Compared to debt mutual funds, for instance, you can invest via online bond platforms directly and you don’t have to worry about expense ratios and additional transaction charges eating into your returns. Moreover, when choosing corporate bonds, you’re aware of the maturity date right from the beginning which reduces uncertainty and aids in better investor-planning.
You can use an investment platform such as Hargreaves Lansdown or Interactive Investor to buy short-term corporate bonds with maturities of five years or less, medium-term bonds that mature in five to 12 years, or long-term bonds that mature in more than 12 years.
The Jupiter Strategic Bond and Man GLG Sterling Corporate Bond funds are solid standard corporate bond funds, offering 5pc and 7pc respectively.
Similarly, Artemis Corporate Bond fund has returned 4pc since its launch three years ago and has a 5pc yield.
Typically corporate bonds have minimum investments of £1,000, but you could also buy a diversified bond portfolio for much less using bond ETFs. Remember that any bond rated under B+ is not investment grade.
Overall, corporate bonds could potentially be a valuable addition to an investment portfolio, but it is crucial to do your research and understand the risks involved.
The benefits tend to be a steady income and less volatile prices, which are not always offered by stocks, while corporate bonds typically pay out more than equivalently rated government bonds.
