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There is still value in Corporate Bonds, says L&G

Thursday 10th February 2011
Despite the handicaps of low government yields, compressed credit spreads, peripheral European sovereign risk and an investor base seemingly desperate to re-enter the stock market, investors should keep an eye on the corporate bond market in 2011, says Ben Bennett, Credit Strategist at Legal & General Investment Management.

According to Bennett, despite such adversity, corporate bonds may continue to triumph.

Bennett argues that investors cannot expect the returns of 2009 and 2010 again, acknowledging that these were years of extreme returns in corporate bonds but stressed nevertheless corporate could still offer investors value this year.

Bennett said the incredible returns in the last two years arose as a correction of the dire conditions of 2007 and 2008 and that this could not be seen as an indicator of future performance in the asset class.

In addition, he argued it was a “good thing” corporate bonds were getting back to basics and, although 2011 is not likely to offer spectacular returns, credit could still be attractive as an asset class due to the downside protection it offers from inflation, risks to growth and the issues surrounding peripheral European sovereigns.

While the heavy corporate bond issuance of recent times should be more moderate in 2011 as companies reduce their reliance on bank funding, Bennett believes the year should remain supportive for corporate bonds.

"Following such a stellar performance during 2009, many investors doubted the ability of corporate bonds to post strong total returns again in 2010, but that is exactly what happened,” said Bennett.

“As we go into 2011, with a low interest rate environment constraining the returns in government bonds, corporate bonds can still offer a lower risk alternative to equities."

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