In this article, Ian Rees Head of Multi-Manager at Premier Miton looks at all things bonds and says that investors should be prepared to conduct thorough due diligence on their chosen managers as putting in such effort continues to offer good reward.
It is interesting to note that it was almost 4.5 years ago that the UK 10-year bond yield sat at a paltry 0.5%. Since August 2021, things have changed quite considerably! It took a little less than 2 years for the yield to move beyond 4%, to finally bobble around 4.5% since the summer of 2023.
This much improved yield environment has led to the popular cry of “Bonds are Back!”, a realisation that nominal yields now provide a role in income portfolios once again. While this sentiment appears justified, investors should consider other factors beyond an attractive ‘all-in’ yield when evaluating the attractions of bond opportunities.
The first matter to consider is the rise in volatility for longer maturity bonds. A significant cause for this has been the increase in the UK base rate, itself moving from 0.1% in December 2021 to 5.25% by September 2023. However, policy rates are not the sole cause; inflation and the expectations of it also influence duration outcomes.
Following the 2020 global pandemic, an inflation shock was felt as many economies struggled to meet the rapid recovery in demand. This was exacerbated by supply chain disruption arising from the suspension of manufacturing activity within large parts of the economy.
Since then, inflation has remained far stickier than most commentators expected, with increased food and energy costs helping fuel the ‘cost of living crisis’ that has been widely reported on.
Since the start of 2025, inflationary considerations have also encompassed a few other drivers, notably the tariff policies of the US administration (tariffs effectively being a tax that raises the cost of imports).
The narratives of ‘national security’ and ‘resource independence’ have helped fuel increased commitments to defence and infrastructure spend, seen a resurgent commodity environment, while the AI leadership race has increased corporate spend in this area, with surging demand for semi-conductors and energy generation.
Besides these inflationary threats, there has been increasing angst about the overall debt burden of government borrowing in economies such as the US, Japan, Europe and the UK.
It is no wonder that duration, a measure of bond sensitivity to changing expectations of interest rates (itself affected by the changing expectation of inflation), has created a volatile period for government bond investors that may continue for some time.
High quality investment grade corporate bonds can offer an alternative to government bonds. These generally have a shorter maturity profile but are subject to the credit risk of the borrower, for which investors are paid an additional ‘spread’ as compensation for this risk.
As in the Global Financial Crisis of 2008/09, there are now some high-quality issuers with better ratings than the sovereign bonds in the same domicile. This has resulted in the spreads having compressed to quite slender levels.
While this situation persists, aided by lower corporate leverage and comforting interest coverage, it remains a challenge to find much value here. In addition, sub-investment grade bonds, which provide even greater credit risk, provide a lack of high yield return.
Long before the sharp upward movement in bond yields seen in 2022, we had taken a deliberately conservative approach to our bond allocations in seeking shorter duration exposures and floating rate bonds, the aim being to insulate capital values from the negative effects of duration moves, particularly in a rising yield environment.
As a result, the sub-asset class of asset-backed and structured credit bonds attracted our attention by providing low duration characteristics and asset backing in the event of a default.
Additionally, these instruments can provide an enhanced yield resulting from regulatory requirements and perceived complexity.
However, the main cause for their greater spread attraction results from being unfairly tarnished as demonic bond structures at the epicentre of the Global Financial Crisis of 2008/9. Due to a lack of understanding and investor disinterest, many high-quality issues with considerable collateral support were overlooked and mis-priced for the risks they were exposed to.
This backdrop provides a rich source of relative value opportunities for those able to dedicate some time and resource to researching the opportunities.
While savvy investors have made the glaring mispricing of asset-backed and structured credits less extreme now, we still find this sub-asset class offers a very attractive yield premium to corporate credit bonds with a similar rating along with high-quality collateral benefitting from an improving credit profile as some principal (amount originally borrowed) is typically repaid over the loan term.
It is noteworthy that we find many bond managers allocating to asset-backed and structured credit instruments within their diversified and multi-asset bond strategies.
This should be a clear indication of the appeal for such instruments and should provide the encouragement to more discerning investors to source direct exposure with specialist managers themselves.
While institutional investors still dominate this asset class, the European ABS market has grown in size to more than €600bn (as at the end of 2025), providing enormous liquidity and depth of opportunity for skilled managers to offer stand-alone strategies for investors to access.
The alternative credit manager TwentyFour Asset Management launched their high-quality Monument Bond fund as far back as 2009, expanding their offering with a sub-investment grade Asset Backed Opportunities fund more recently.
Even established bond houses have been getting in on the act too, M&G, who have considerable credit expertise, launched their Investment Grade ABS fund in September 2024.
These developments spotlight asset backed and structured credits as an emerging and growing asset class within their own right. In accessing the opportunities that this emerging asset class offers, careful analysis will provide a greater understanding of their robust structures and the level of credit risk being taken to dispel many of their myths.
Beside greater yield cushion, they provide defensive characteristics due to lower duration sensitivity and credit resilience from collateral backing. Such instruments also aid diversification to standard corporate credit risk within portfolios from being predominantly secured on consumer borrowers.
Investors should also be prepared to conduct thorough due diligence on their chosen managers to verify their skill, scale of operation, available resource and market access. It is our belief that putting in such effort continues to offer good reward.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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