How European bonds could be losing you money

Normally, when we invest in a bond, we are giving money to a government or a company as a loan and, in return, they are paying us a regular income until such time as they repay said loan.

But that’s not the case right now. Low interest rates and a 35-year bond bull market have led to ‘negative yields’ in some countries.

Let me explain. But first imagine I have big wooden spoon, and I’m now stirring the already near-boiling-point Brexit pot…: Negative yields mean bond holders now have to pay certain EU governments for the privilege of lending them their money.

Waverton European Capital Growth managers pointed out recently that, “in the Euro area, 51% of all government bond paper now has negative yields. This is particularly notable in Germany, where over 80% of the government’s debt has negative yields.”

It’s quite incredible really. But before we get all hoity-toity about it, it’s worth noting that a UK 10 year government bond yields less than 1%* today. You can get more in interest from Marcus (Goldman Sachs retail bank launched last year) and Sainsbury’s Bank, which both pay 1.5%*.

Unfortunately this is not a new phenomenon. The amount of negative-yielding government bonds outstanding until 2049 has risen by about 20% to 9 billion euros – but it is still below the 11.6 billion euros in 2016**.

Neither is this phenomenon linked solely to government bonds. According to figures from the Bloomberg Barclays Euro Aggregate Corporate Index, around 230 billion euros in corporate bonds were yielding less than 0% (if held to maturity) in the first quarter of 2019 – the highest figures since the end of 2017.

Thankfully, the bond universe is a big one, and there are still opportunities to find a decent level of income, without taking on too much extra risk. Active fund managers investing in bonds are also able to combine an income with capital growth, which means total returns can be much higher than the headline yield. Below are four funds investing in such opportunities.

M&G Strategic Corporate Bond, current yield 3.13%*

This fund invests mainly in investment grade corporate bonds, but up to 20% may also be held in high yield bonds, government debt, convertibles and preference stocks. It is one of two corporate bond funds managed by Richard Woolnough, and is the slightly more flexible of the two with the ability to move away from its benchmark at times when the opportunity to add extra value arises. The fund has a total return of 21% over the past five years***.

BlackRock Corporate Bond, current yield 2.69%*

This fund also has a flexible mandate, while manager Ben Edwards has a proven track record of consistently exploiting inefficiencies in the fixed income market. While the majority of its bonds will be investment grade with relatively high credit ratings (meaning the company is less likely to default on the loan), Ben has the ability to source other ideas from asset backed securities, high yield and unrated bonds, as well as those denominated in euros and US dollars (although these will be hedged back to sterling). It has a total return of 27.7% over the past five years***.

TwentyFour Corporate Bond, current yield, 4.42%*

This fund is constructed using a total return mindset, rather than just focusing on making the most income possible. Chris will have a mixture of around 80% investment grade and 20% high yield or floating rate notes at any one time. Within the investment grade section, there will be a strong weight to gilts and supranationals (such as the European Union or the World Trade Organisation). To find his holdings, Chris uses their bespoke quant research tool Observatory. The fund will only hold a maximum of 100 stocks at any one time. Returning 17.9%^ since launch in 2015 we feel it is one of the most dependable corporate bond funds out there.

GAM Star Credit Opportunities, current yield 4.4%*

This is a high-income bond fund with a unique strategy. The idea is to invest in ‘junior debt’ – bonds that are lower down the priority list for repayment if a company goes into default – but the junior debt of investment grade companies, which allows the fund to generate a good income, whilst still keeping a high-quality portfolio. It has a low turnover strategy, as the managers’ process looks for bonds they can buy and hold for some time. It has a total return of 38.1% over the past five years***.



*Source: As at 23 May 2019
**Source: Financial Times,
***Source: FE Analytics, total returns in sterling, five years to 22 May 2019
^Source: Source: FE Analytics, total returns in sterling, 15 January 2015 to 21 May 2019

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.