British fixed income managers are favouring the corporate bond sector, according to Standard and Poor’s UK Fixed Interest review.
S&P say managers are choosing BBB rated bonds which they see as representing historically good value.
Demand for corporate bonds is being matched by huge supply, as companies use the bond market to refinance loans previously received from banks.
However, S&P say that market liquidity remains limited, and that buying corporate bonds is becoming increasingly challenging. Whilst issuance is increasing, new issues can be up to five times oversubscribed.
On a sector basis, S&P say managers like new industrial corporate issues, and many say financials remain attractive.
Managers disagreed over prospects for high yield bonds, with some saying they will consider scaling down high yield positions throughout the rest of the year.
S&P say managers see investment grade companies as the most likely market survivors, offering better risk-adjusted returns with lower volatility.
At the same time, S&P says it had upgraded the Standard Life Investment Funds – Select Income fund and the Standard Life Investment Funds – UK Ethical Corporate Bond fund to AA.
The Baillie Gifford Bond Funds – Corporate Bond fund and the Baillie Gifford IG Bond fund were downgraded to A, and the Old Mutual Corporate Bond fund was downgraded to AA.