Yields on corporate bonds are shooting up. But where many other bond fund managers are sinking money into the sector right now, Jim Leaviss isn’t doing so yet. The Manchester University economics graduate is moving his M&G High Yield Corp Bond Fund (up 26% over five years) into government bonds instead, which his investment remit lets him do. “It’s all about the credit crunch. There are some really nasty things happening in the banking sector at the moment,” he tells The Guardian. Indeed, the yields on UK bank bonds have widened sharply.
For example, yields on Alliance & Leicester bonds are now 5% above those of UK gilts, which are considered one of the safest forms of investment. “The Federal Reserve is doing exactly the right thing, and will keep cutting, possibly until rates are as low as zero,” he tells Investment Adviser. He believes the Bank of England will have to follow the Fed’s lead “and slash interest rates quickly”, as the UK economy weakens – making bonds, with their fixed-interest payments, more attractive. Yet “the UK bond market still expects interest rates to bottom out at 4.25%”.
With room for yields to fall further (bond prices rise as yields fall), Leaviss believes investors will make a total return of 6%-10% this year by investing in a bond fund. On the corporate side, he’s avoiding banks, but likes utilities and telecoms. Over five years, “corporate bond funds are looking extremely attractive, and if you’re at all nervous about a coming recession, M&G’s funds look like the place to be”, says Patrick Collinson in Fund Strategy.
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M&G High Yield Corp Bond Fund top ten holdings
Name of holding, % of assets
Treasury 8.75% 25/08/17, 3.7%
Germany 4.25% 4/7/2017, 2.7%
Lighthouse Int’l Co S 8% SNR NTS 30/4/14, 2.3%
Crown Eur Hld’gs S 6.25% SNR NTS 1/9/11, 2.1%
Treasury 4 3/4% STK 2015, 2.1%
NRDC Tlphn Company Hld’g 8.25%1/5/16, 1.8%
Peel Hld’gs 9.875% 1ST MTG DEB STK 2011, 1.6%
Constellation Brnds 8.5% 15/11/09 SER ‘C’, 1.5%
Fresenius Med Cr Cp Tst V 7.375% 15/6/11, 1.5%
Treasury 8% STK 2021, 1.4%