Corporate Bonds - Still Worthwhile?

Mr.Brown_4

Fed up with my cash ISA, very small return, have switched completely into Corporate Bonds, adding to my already heavy position. Great profits last year, great yield, but wondering about the outlook.

Is it a bubble? Is inflation a risk?

Please reassure me.

Aegis

Mr.Brown wrote: »

Fed up with my cash ISA, very small return, have switched completely into Corporate Bonds, adding to my already heavy position. Great profits last year, great yield, but wondering about the outlook.

Is it a bubble? Is inflation a risk?

Please reassure me.

Corporate bonds have gone up quite a lot in price and reduced in yield since last year because the start of last year saw some of the lowest confidence in corporate debt in years. With cash rates currently quite low and inflation still a potential concern, I'd be wary of putting very large weightings into corporate bonds, as it's an asset class which may see reductions in capital value as the yield spread between cash accounts and corporate bonds narrows.

As always, there's no right or wrong answer until after the fact, but be wary of too much concentration in any single asset class within your portfolio.

Mr.Brown_4

Aegis wrote: »

it's an asset class which may see reductions in capital value as the yield spread between cash accounts and corporate bonds narrows.

That is my concern, but for now outweighed because I am utterly sick of the .5% interest my Fidlity cash ISA has been paying. I am hoping that any expected change in interest rates - ie. up, or inflation outlook - will be flagged up ahead of it happening and allow me enough time, if necessary, to cash in some bonds at that point and perhaps target mortgage.

I am not a particularly 'active' investor, but I just couldn't stand the low interest rates any longer.

JamesU

Mr.Brown wrote: »

That is my concern, but for now outweighed because I am utterly sick of the .5% interest my Fidlity cash ISA has been paying. I am hoping that any expected change in interest rates - ie. up, or inflation outlook - will be flagged up ahead of it happening and allow me enough time, if necessary, to cash in some bonds at that point and perhaps target mortgage.

I am not a particularly 'active' investor, but I just couldn't stand the low interest rates any longer.

Or how about an inflation proofed portfolio? Interesting article in link below, to be taken with a pinch of salt of course. And should somebody start digging about the merits of gold, there is a component in the example portfolio.....

http://www.investorschronicle.co.uk/InvestmentGuides/Funds/article/20091124/a720d44c-d840-11de-99a4-00144f2af8e8/An-inflationproof-portfolio.jsp

JamesU

JamesU

Aegis wrote: »

Corporate bonds have gone up quite a lot in price and reduced in yield since last year because the start of last year saw some of the lowest confidence in corporate debt in years. With cash rates currently quite low and inflation still a potential concern, I'd be wary of putting very large weightings into corporate bonds, as it's an asset class which may see reductions in capital value as the yield spread between cash accounts and corporate bonds narrows.

As always, there's no right or wrong answer until after the fact, but be wary of too much concentration in any single asset class within your portfolio.

And further to what Aegis has already said, I really liked the overview in the article below on potential pitfalls with corporate bonds right now. Worth a read.

http://www.investorschronicle.co.uk/InvestmentGuides/Funds/article/20100215/eedf794a-17cf-11df-b0bd-0015171400aa/On-the-defensive.jsp

JamesU

King_Weasel

Mr.Brown wrote: »

I am utterly sick of the .5% interest my Fidlity cash ISA has been paying.

So you should be. But consider the best cash ISAs along with possible alternatives to cash. A lot might depend on how likely you are to need the cash in the next few years.

jamesd

No reassurance on bond funds or gilts from me. I'm more interested in avoiding them than buying them. Bond funds in the strategic bond sector, non-UK bond funds or equity income funds seem more sensible to me with a prospect of both inflation and interest rate rises that could reduce capital value.

oldfella

I have gone for equity income funds this year.

JamesU

jamesd wrote: »

No reassurance on bond funds or gilts from me. I'm more interested in avoiding them than buying them. Bond funds in the strategic bond sector, non-UK bond funds or equity income funds seem more sensible to me with a prospect of both inflation and interest rate rises that could reduce capital value.

I am in complete agreement with all of this too.

JamesU

Jake'sGran

oldfella wrote: »

I have gone for equity income funds this year.

I did this last year and the year before but have been worrying lately that Neil Woodford is having a mid life crisis. His two funds are well down the performance table. Got to stick with it for a while I suppose.

jamesd

No mid life crisis, just a deliberate view taken that he didn't trust the recovery last year and put protecting people's money ahead of trying for growth. For those who used a FTSE tracker last year to get the growth it's interesting to consider switching to one of his funds now to reduce the drop potential. Well worth remembering that he runs some of the biggest and most popular funds in the UK and knows that a lot of people have their retirement money with him, with a desire that he protects it.

I don't suggest using his funds so much if you're a short term optimist about more stock market price growth and want to gain from that if it happens.