Imminent interest-rate increases and rising inflationary pressure have scared investors away from bonds but some fund managers suggest value can still be discovered in bond investment by diversifying within the bond universe. Credit Agricole Asset Management head of euro fixed income and credit Jean-Francois Boulier suggested investors consider switching from US dollar bonds to euro-denominated debt. 'Europe still has a lot of problems ... but the savings rate in Europe is relatively higher [than the United States], which will bring more stability to the financial markets and the economic growth,' Mr Boulier said. Investing in euro bonds could also bring benefits of currency diversification and improving credit amid a recovering economy, the fund manager said. He also suggested a diversification into inflation-linked bonds which could well hedge against inflation fears. An inflation-linked bond is a bond whose principal is indexed to the inflation rate. 'We see trend of inflation in Europe,' he said, pointing out rises in oil prices and property values. He expected the European Central Bank would raise rates 75 basis points starting next year. Mr Boulier suggested an allocation of 5 to 10 per cent of the bond portfolio in inflation-linked debts. He was overweight on corporate bonds, on hopes of further spread tightening because of an improving corporate credit profile. First State Investments Asian fixed income head Ben Yuen said, however, that he was not too keen on inflation-linked debts. In an inflationary environment, inflation-linked bonds would outperform straight bullet bonds, but the indexed inflation instruments would offer a relatively lower carry yield and less attractive absolute return, Mr Yuen said. Data from Credit Agricole showed indexed inflation bonds would offer a premium of 1.2 per cent over an estimated short rate with a risk measure of 3.5 per cent. But with the same risk level as an inflation-linked instrument, an international bond gave a slightly higher premium at 1.5 per cent.
