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Bowie: inflation could trigger 30% losses for bond funds

Top rated bond fund manager Chris Bowie has warned creeping inflation could inflict serious losses for some bond investors.

 
Bowie: inflation could trigger 30% losses for bond funds

Top rated bond fund manager Chris Bowie has warned creeping inflation will eventually trigger a rise in gilt (UK government bond) yields which could inflict serious capital losses for some corporate bond funds.

Citywire AA-rated Bowie has defensively positioned both the Ignis Corporate Bond  fund he has run for four years and the Ignis Absolute Return Credit fund which he launched last year to deal with the threat of rising inflation, higher interest rates and a consequent fall in bond prices caused by yields rising in line with the cost of borrowing.

Bowie has avoided most bonds from financial companies, cut exposure to the risk of rising interest rates and bought asset-backed bonds issued by supermarkets. The corporate bond fund has just 10% in gilts and around 7% in cash.

While Bowie thinks corporate bonds still offer attractive returns in the short term, he warned the situation could change very quickly.

'For now, wage inflation is not an issue in the UK and consumer prices have fallen from recent highs but I think real yields on gilts will adjust back up towards 2.5% within the next few months,' Bowie said.

'As long as persistent deflation does not occur, real yields will adjust upwards. It will certainly not be years away,' he added.

Bowie said: 'When it comes, fixed income returns will be hit hard. As a general rule, credit loses 7.8% of its capital for every 1% move higher in gilt yields. Ten-year real yields on gilts are about -1% and the long-term average is 3%.'

'If it goes back to the long-term average that is a capital loss of 30% so we think all the risks are on the downside.'

'We have minimum exposure to financials and consumer-related bonds and prefer supermarket bonds which can provide the reassurance that if they did default, the bond holders would have the right to their assets, be it machinery, property or land,' he said.

Bowie's comments come amid signs that investors are moving money from expensive bonds into better value shares. Citywire Money columnist David Kempton has also said he has sold all his government bonds.

Three of the corporate bond fund's top 10 positions are in bonds issued by Sainsbury and Tesco, which invest in the property portfolios of the supermarket chains.  

The fund also has around 10% in floating rate bonds where the coupon is reset every three months. These should do much better as interest rates rise.

'In one of the next five years we expect double digit losses for credit so we can use these floaters to protect against that.'

Over three years to the end of December, the fund has returned 37.6% compared to the Markit iBoxx Sterling Corporates index which it uses as a benchmark. It returned 32.4%

The new Ignis Absolute Return Credit fund targets a return of cash plus 5% and like the corporate bond fund is co-managed by Adam Walker.

Watch The Lolly survival guide to investing in bonds

13 comments so far. Why not have your say?

Tony Peterson

Jan 31, 2013 at 15:22

Had to happen.

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joe stalin

Jan 31, 2013 at 15:34

Only 30%? a bit more than that I think. could get very messy as everyone tries to head for the exit at the same time especially as investors have been put off switching into equities by media cassandras

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Geoff Downs

Jan 31, 2013 at 15:54

Here we go again. The inflation doom mongers.

What will cause inflation?

When will this happen?

Food and energy price inflation is probably caused by financial speculation.

It's deflation and bonds will be OK.

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MikeG

Jan 31, 2013 at 16:28

Corporate bonds returning 5.5% or above are still way above inflation and still beat by a long way the best savings products on the market. So if you invest in say a 5-year fixed rate savings product at Best) 3.75% if inflation rises to say 4% you will be losing money ....but the 5.5% corporate bond will still be ahead of the game ....so wahts the problem ???

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Anonymous 1 needed this 'off the record'

Jan 31, 2013 at 17:42

Fuel goes up 4p a litre

Gas and Elec by 9% to 12%

Food bill goes up 10%

Travel cost increases guaranteed to exceed inflation

Rents soaring

etc etc

Everyone knows that the real inflation rate is well over 4%

Bonds even at 5.5% are guaranteed to lose money in the present inflationary period.

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Brian C

Jan 31, 2013 at 17:49

UK Gilts may well take a bit of a hammering but in general corporate bonds won't take quite as much.

The rise in stock markets will subside once all of the money from people pulling out of bonds has found its way there.

Cash deposit rates are still in a downward trend

Maybe putting it under the mattress ain't such a bad idea

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Geoff Downs

Jan 31, 2013 at 17:59

Some of the money from QE has gone into financial speculation through the emergence of ETF's, especially in commodities.

This has probably fuelled inflation in food and energy.

It is unlikely though that inflation in general will be a problems as it is not getting into the real economy and expanding lending and subsequent borrowing.

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joe stalin

Jan 31, 2013 at 18:10

the swappers knew what they were doing they are only whingeing because Mervyn dropped rates if they did nbot see that as a possibility then too bad. The FSA continues with its politically motivated crusade against the banks because they were made like absolute turkeys when the crisis was at its peak.

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Steve Hayes

Jan 31, 2013 at 19:49

@Mike G

the 5.5% coroporate bond is comparable if it too is repayable in 5ish years. if it's long date, so you might wish to sell it before it's due, the capital loss would bite you.

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Steve Hayes

Jan 31, 2013 at 19:51

Any comments about Zopa? Can anyone forsee any dangers with Zopa which make it more of a risk than other savings accounts?

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Gatser

Jan 31, 2013 at 21:55

Speculative doom-mongering!! Very few of those experts consistently get it right so I am staying put with my bonds thank you. Its more about having a good spread of investments and taking the rough with the smooth.

Just wait and see what they say when FTSE100 dips below 6000 in a few months! The economy will not begin a sustained recovery until 2018.... you wait and see....

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masud butt

Jan 31, 2013 at 23:23

I would like to invest part of my pension fund, in fund which invest in Long corporate bonds. any suggestions please. Thanks

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StepM

Feb 05, 2013 at 15:47

My advice is to put as much money as you can on your roof, by that I mean solar PV. Guaranteed (well subject to 'average' sunshine hours) return of 10% over 20years with no tax and inflation linked. Mine have been in a month and despite a lousy January, yield is running at 4.1% so am happy to expect 10% over the year. Wish I had a bigger roof.

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