Difference blows away bubble fear

Bond markets offer value in selected areas - such as British financials - for the cautious manager as spreads between corporate and government securities maintain historical spans.

Within non-financials, there is a bit of value in the crossover area, between low-BBBs and high-BBs. Names like Daily Mail & General Trust are interesting, since they have reduced leverage and could recover their investment grade rating in the near future.

What we have witnessed in markets is a typical ­summer rally, and the final three months of this year will be more volatile. October is usually a month in which it is wise to tread carefully.

The technical picture looks supportive for high yield, but if economic data continues to be mixed then high yield may struggle.

Australian government bonds represent a buying opportunity. With a housing market rolling over and an economy heavily-influenced by a slowing China, the 10-year Australian government bond with a yield of over 5% is attractive.

Australian government finances are also among the most robust in the world, with negligible net debt to GDP. Investors can reap rewards by locking in currency gains on holdings in Canadian and American dollar bonds, by hedging out future currency exposure.

Economic data has been mixed. Recent manufacturing indicators point towards some improvement and employment data has been a little better, but American housing data has definitely taken a turn for the worse. As a result, rates will remain low for an extended period and demand for credit will continue to be strong. There is a lot of money in the system looking for a return, and corporate bond funds are still seeing sizeable inflows.

It is time to take some profits and adopt a cautious stance, to ride out any volatility in the coming months. There is still value to be found in selected areas of the bond market, however, and investors should remain on the alert for any opportunities.