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Flexible bond funds and the balance of risk

Funds with a flexible approach weigh up different risks
June 16, 2022
  • A number of strategic bond funds have a substantial allocation to government bonds
  • Some strategic bond funds have a large exposure to high-yield bonds
  • Both these types of bonds face risks

With inflation and rate rises continuing to dominate the agenda, a bad spell for equities has proven even tougher for bonds. Government debt, for example, has been hit with the average fund in the Investment Association UK Gilts sector racking up a 16.1 per cent loss over the six months to 8 June. That’s more than twice the 7.5 per cent fall in the MSCI World index of equities.

As ever in a sell-off, talk of more attractive valuations emerging has already begun. Several professional fund investors have begun to buy into defensive parts of the fixed income universe, including government and investment grade bonds. Lower prices offer something of a buffer while the accompanying rise in yields means some bonds look more attractive from an income perspective. To take a flagship government bond as an example, the US 10-year Treasury's yield hit 3 per cent in recent months – the first time it has reached such a level since late 2018.

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