I would like to suggest the answer to this is both yes and no.
Now, I realise that such an ambiguous answer does not really help, or answer the question for that matter. Let me explain what I mean.
There is much talk in the market at the moment about risk: the risk of shifting investments up the risk spectrum; the risk of taking on increasing amounts of credit risk; the risk of a big sell-off in bond markets; and the risk of liquidity drying up in credit markets.
The problem with risk, though, as quite clearly demonstrated by the above, is that it means different things to different people.
Perhaps it would be better to rephrase and say that investors should spend less time thinking about yield and remember why they bought bonds in the first place.
I do not presume to know every reason why every bond has ever been bought.
However, there are some common themes on which it may be worth spending a moment or two.
The right balance?
The primary reason why many investors buy bonds in a portfolio context is for diversification and, more specifically, to counterbalance the equity holdings they may have.This is a classic example of where searching for yield may not be particularly helpful.
Generally speaking, the higher yielding the bonds, the greater their correlation to equity markets.
High-yield bonds, for example, usually have a fairly high correlation to equities, whereas gilts do not. At the extreme, equity income has an almost perfect correlation to equities.
This argument has been muddied in recent times by some increased correlation between government bonds and equities, but at times of market stress the diversification benefits of gilts tend to be significant.
This will not be breaking news to anyone but it is perhaps something that we all need to remind ourselves of from time to time when attractive yields elsewhere catch our eyes.
For example, the Fidelity Strategic Bond Fund is has a flexible mandate and can asset allocate between various parts of the fixed-income markets.
Manager Ian Spreadbury believes one of the fundamental reasons that investors buy his fund is to diversify their equity exposure – as well as for income generation and access to the wider asset class.
So, while he looks to add value at both the asset allocation and stock selection level, Spreadbury has capped high-yield exposure at 50% as he believes that after this point the correlation to equities starts to increase to unacceptable levels.
Predictably safe
Another reason some investors hold bonds is for the lower volatility and increased security they offer relative to equities.
