With inflation still roaring away and bond investors nursing the deepest losses suffered in decades, now might not seem like a great time to invest in bonds. But, surprisingly, seasoned bond investors are more positive today than they have been in a long time.

Rebecca Young who co-manages the Artemis Strategic Bond Fund (FUND:B2PLJR1) told Shares ‘income has returned to the asset class which investors haven’t been able to talk about for
many years’.

Young argues the repricing of bonds over the last few months means the starting point is far more sensible today than it has been for a long time. Famed bond investor Howard Marks would
appear to concur.

Marks recently told the Financial Times: ‘Risk aversion has replaced FOMO (fear of missing out)’ which has resulted in debt being available at ‘very attractive’ returns.

Young highlights the importance of starting with what the market has already priced in. The market-implied peak in UK interest rates is around 4.5%, somewhere in the middle of 2023.

Bond prices and credit spreads (the extra yield on offer from company debt over government debt) have adjusted accordingly. Young gives the example of the UK short-dated ‘triple B’ index which yields 6% today compared with 1.7% at the start of 2022.

This looks ‘historically attractive’ according to Young, who believes investors are now getting ‘adequately rewarded’ to take on the risk of lending to investment grade companies. Triple B is the lowest rung on the investment grade ladder.

The manager also believes we are approaching peak inflation in the core UK, European and US economies which potentially removes a headwind for bond prices.

Young manages the £1.13 billion Artemis Strategic Bond Fund alongside Juan Valenzuela who has been managing bonds since 2003.

The fund aims to provide a combination of income and capital growth over a five-year investment horizon. It has the inbuilt flexibility to invest across different types of bonds as the economic cycle turns and market conditions change.

The portfolio typically has between 100 and 130 positions and risk is spread across different sectors, quality of issuers and maturity profile.

Over the last 10 years the fund has delivered an annualised return of 2.91% a year compared with a 1.64% return from the Investment Association Global Flexible Bond benchmark. The fund has an ongoing charge of 0.57% a year and offers a yield of 3.6%.

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