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Bond Funds Not Ramping Up Credit Risk 

November 7, 2016

Jake Moeller, Seeking Alpha

"Lower for longer" is the new mantra. Certainly in the U.K. and Europe, and perhaps a little less so in the U.S., the anchoring of low end rates continues to drive yield-thirsty investors to distraction.

Whispers about a bond bubble have been around for several years now, but with asset buying by central banks becoming an established policy measure, utterances are becoming louder and are coming not just from investors. There have been several high-profile investment executives warning of bond overheating.

Large inflows have forced the hands of many bond fund managers to seek ways to fully invest them. The average bond size in the IA Strategic Bond sector, for example, has increased from £410 million in September 2011 to £610 million in September 2016. Increasingly, bigger funds contain more securities or larger positions in individual lines, with managers sometimes being forced to move up the credit spectrum to maintain a decent yield in a world of tight compression.

Have these inflows caused a material increase in credit risk for bond funds? It is worth examining two popular bond sectors to see in which credit buckets U.K. bond fund managers are concentrated. Read more

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