Bond Watch: the low-risk, high-yield bond funds

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.          

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.          

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Which investment-grade bond funds yield the most?  

In fixed income, bonds with longer timelines until maturity generally yield more to compensate investors for the added inflation risk and default risk due to a longer lending period. But they also have higher “duration”, which is the sensitivity to interest rates, meaning that investors owning a portfolio of longer-dated bonds can see big swings in their value due to interest rate changes. 

However, currently some of the highest-yielding investment grade sterling bond funds are investing in bonds maturing soon – a more stable part of the fixed income world, which is particularly useful for bond investors looking for income while cutting back on risk.  

This is because the yield curve is inverted, meaning that yields are higher in bonds maturing soon and lower in those in the middle range, from three years to 10 years, before rising again for longer bonds. The inverted yield curve reflects expectations that interest rates and inflation are still high today, but the medium-term outlook is better.  

This means that the income yields on some of the most stable corporate bond funds are very attractive right now, creating a potential opportunity for investors.  

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Data from FE Analytics shows that abrdn Short Dated Corporate yields 5.4%, while Royal London Sustainable Short Duration Corporate Bond and M&G Short Dated Corporate yield 5.29%. 

The highest-yielding funds currently are Man GLG Sterling Corporate Bond (6.49%) and Liontrust Sustainable Future Monthly Income Bond (5.7%). 

These are the income yields on the portfolios – an annualised measure of the income paid out over the past 12 months.  

Income paid out is not the only reflection of the value of a bond’s portfolio or how much risk it is taking. A fund factsheet will also have a yield-to-maturity figure, which is the total return for the bonds if held to maturity and the principal amount is returned.  

Bond giant likes gilts  

Pimco, which manages nearly $2 trillion (£1.6 billion) in assets, is positive on the outlook for gilts. Its chief investment officer Andrew Balls told the Financial Times that he has a larger than normal position in gilts and is not worried about the government deficit widening in the run-up to a general election, likely to take place at the end of 2024.  

He also said that both major UK political parties would have similar fiscal policy following an election, which means that the election is unlikely to have a big impact on the bond market. 

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Gilts currently yield less than US government bonds, at 3.96% for a 10-year bond compared with 4.2%. Both central banks have interest rates at a similar level, at 5.25% in the UK and between 5.25% and 5.5% in America.