Bonds

The world's major central banks have been in uncharted waters for the past five years. The extraordinary experiments in monetary policy have led to historically low levels of volatility, markets awash with liquidity, and record low bond yields. It has made predicting bond price movements very difficult.

It has been quipped that bonds now offer 'reward-free risk', and if rates rise faster than expected we could see big capital losses. At best, you will continue to receive your coupon. The question is why bother, when dividend yields on many stocks remain surprisingly high. The flattening of the yield curve shows that we are in economic transition and I don't expect rates to rise quicker than expected, so I'm not worried about duration risk for the time being (but it is a medium-term concern). Also, default rates can remain low forever, so I am concerned that high-yield investors are not getting paid for the risk they are taking on. In this tougher and more complex environment I prefer strategic bond funds, particularly in a rising rate environment.

We would look toward strategic bonds, which have more flexibility to deal with a tough environment for fixed income investors.

Chelsea Selection or Elite Rated*: PFS TwentyFour Dynamic Bond and Jupiter Strategic Bond

*by fundcalibre.com