Professional investors are buying bonds. Should you be as well?

Yields low and prices high, yet some investors think there's good value in the bond market

DIY investors have preferred stock market funds but professionals are going elsewhere

Professional investors have been piling into bonds as uncertainty abounds but DIY investors continue to shun the asset class. As stock markets wobble on the back of lockdown fears and yields fall as central banks meddle with markets, who will be on the right side of history?

According to data from the Calastone Fund Flows Index, a report published monthly, professionals put £450m into bond funds during August, nearly matching the £466m that went into all other fund types combined. This was the fifth month in a row bond funds have seen money flow in, well above the average over the past three years.

DIY investors have much preferred to invest in stock market funds. The Vanguard Global Bond Index fund was the most popular bond portfolio for users of Interactive Investor, but was 37th on the list of most-bought funds.

Edward Glyn of Calastone said the volatility of bonds was very low at moment, making them slight more attractive as a place to park money.

Since March as central banks around the world have taken drastic monetary policy action such as lowering interest rates and buying government and corporate debt to calm the market and inject money into it. “This calm is attracting some investors,” he said.

However, he said the DIY crowd might have it right as bonds are not the safe haven they used to be.

“With interest rates near or even below zero on the most bonds worthy of owing, there is little or no income to be had. Most of the returns from bonds are coming in the form of capital gains as falling rate expectations have pushed up prices,” he said.

As bonds already yield so little they are unlikely to make strong returns. In addition, any scaling back of monetary policy would likely lead to a a drop in the price of bonds meaning they would lose investors money and be a poor defensive holding.

Despite the risk, professional investors such as Jordan Sriharan of Canaccord Genuity Wealth Management, have been buying adding bonds to their client portfolios. In particular, he bought global investment grade bonds – debt issued by the highest-rated companies – as the market has been cheaper over the past few months.

“Our rationale was that it was an optimal way to provide protection from a fall in stock market because you can invest with some excellent companies that can generate almost 3pc in yield,” he said.

There is a risk that interest rates rise off their very low base which would push up yields and reducing the price of bonds. But Mr Sriharan said this is not an immediate concern as the main catalyst for this to occur would be higher inflation, something that has yet to happen.

“I don’t see inflation getting out of control anytime soon. I appreciate that the lower bond yields get the more vicious a potential sell off could be, but given central banks policies and low inflation expectations it is difficult for bonds sell off over the next year or two,” he added.

For investor that believe bonds will remain a safe haven for the next few years, a strategic bond fund would make the most sense. These can invest across the entire market, investing from safe government bonds down to “junk bonds” – the highest risk bonds available.

TwentyFour Dynamic Bond is listed on the Telegraph defensive 10 of our preferred funds to protect your portfolio. This £1.9bn fund invests globally and is managed by a team of former bond traders. Investors can currently get a yield of 4.2pc, which is high when compared to its peers.