Why Now is a Good Time to Invest in Bonds

Last year, bond markets saw one of the sharpest sell-offs on record. After a decade of very low-interest rates, a rapid reversal resulted in 2022 proving to be the bond sector’s annus horribilis. But things are beginning to look up for bonds, and now could be an exciting time to investigate adding corporate bond funds to your ISA.

2023 could, in fact, be the ‘year of the bond’. The income they promise is much more attractive and, when interest rates peak and then start to come down, capital gains are in the offing.

M&G certainly believes bond investors have entered 2023 in better shape. “We see good value in investment grade credit, which we believe offers natural diversification qualities and a source of resilience during uncertain market conditions,” the company said.

However, before you decide to add bond funds to your ISA, one of the first questions you should ask yourself, is “How much can I invest in an ISA?” Knowing this gives you an excellent foundation from which to start building a diversified and resilient portfolio. For now, here are 4 bond funds worth considering this ISA season.

1. M&G Corporate Bond

Investing in the M&G Corporate Bond fund is one way to access this asset class. It’s managed by the highly experienced Richard Woolnough who uses a top-down investment style to craft his portfolio with an eye on economic growth, inflation and, of course, interest rates.

In a recent fund update, Richard discussed the current economic environment for bonds and explained how he had adjusted the fund, taking into account the less positive economic outlook in the UK than in the US.

This fund holds immense potential for those interested in exploring the investment possibilities of corporate bonds, with the added bonus that M&G has one of Europe’s largest teams of credit analysts who support the fund management team.

2. TwentyFour Corporate Bond

Now seems like the perfect time to invest in Chris Bowie’s TwentyFour Corporate Bond fund, a fund whose investment approach focuses on minimising risk, giving it an inherent bias towards investment-grade bonds.

After branding 2022 as ‘the worst year for bonds in living memory,’ and cautiously positioning the fund in terms of duration and spread risk, Chris is optimistic for the sector’s prospects for the coming year, with consistent yield levels making for an agreeable entry point, although he notes that the current economic cycle is still, “very difficult to call.”.

Launched back in 2015, the fund’s goal since day one has been to generate the highest possible income with the least amount of volatility – something they have achieved by leaning towards bonds that have a relatively low risk of default.

3. Liontrust Sustainable Future Monthly Income Bond

With an experienced team of four at the helm, this bond fund takes a more cautious approach, aiming to deliver monthly income as well as some capital growth by investing in corporate bonds and some government bonds across a diversified range of sectors.

The team believes that, with inflation having shown “demonstrative signs of peaking,” the market is approaching “a potentially important transition period” with last year’s headwinds starting to taper off, providing a more comfortable investment environment.

4. Rathbone Ethical Bond

The Rathbone Ethical Bond fund could be a top pick if you want to put your faith in quality investment-grade bonds with a principled slant. Fund manager Bryn Jones has said in the past, “My fund offers one of the best yields in the corporate bond fund universe and the bonus of a strong ethical screening process” and it’s good to know that the fund steers clear of mining, arms, gambling, pornography, animal testing, nuclear power, alcohol, or tobacco.

A recent update noted that both government debt and corporate bonds had enjoyed a good start to 2023, and that the current environment of lower interest rate hikes and a slowing rather than crashing global economy was driving “strong demand for corporate bonds.” Bryn and his co-manager, Noelle Cazalis, are backed by Rathbone Greenbank Investments, a dedicated ethical, sustainable and impact team that works closely with the fund management team.