High yield bonds attracted €4.4bn, an uptick from last month, while outflows from euro-denominated bond funds have reversed, with inflows for the quarter totalling €3.4bn.
Most attractive funds
The M&G Optimal Income Fund has grown from £11.1bn to £12.7bn in the past three months, attracting the most new capital in the sterling strategic bond sector. It is followed by the L&G Dynamic Bond Fund and the Old Mutual Bond 1.
The performance of the three funds over the past three months is shown in the graph.
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Government and corporate bond outlook
Discussing returns from the fixed income market, Chris Iggo, CIO of fixed income at Axa Investment Management, said government bond yields may go even lower, but at this point it’s not a near term threat especially in light of better-than-expected US employment data for April.
Iggo said: “With the technical set-up of the market still very bullish, our expectation is that yields remain low over the summer and credit spreads can continue to grind lower, even if they are getting to levels not seen since before the height of the crisis in 2008.
“For example, the spread of the UK investment grade bond over government bonds is now 162bp, 5bp lower than where it was at the end of 2007. The same is true for the Euro and US markets while the absolute yield on the sub-investment grade indices has fallen below 5%.”
However, he goes on to say that while investments may seem expensive, investors really have little choice if the risk-free rate is to remain low for some time to come.
“Credit spreads could still halve in the UK if they are to get back to where they were prior to the financial crisis, a development which would again deliver total returns from here of between 6-8%.”
