Sterling bond funds focus primarily on corporate and government bonds issued in sterling, mainly from UK-based entities. These will tend to come in three main guises: UK government bonds; investment-grade corporate bonds - those issued by blue-chip companies; and high yield - bonds issued by higher-risk companies or issues that are classified as subordinated debt.
Each type of bond will perform differently depending on the economic environment. In general, bonds where there is not much credit risk (which means not much risk of default, such as government bonds), will tend to be more sensitive to movements in interest rates.
They may also be more sensitive to rises in inflation - higher inflation will make the fixed income they provide look less attractive.
As a result, government bonds and investment-grade corporate bonds will tend to do better at a time of weaker economic growth, where there is a greater chance of lower inflation or deflation.
High-yield bonds tend to behave more like equities and do better at times of economic growth, when default rates for companies are lower. Bonds can be an important source of income for investors. Our 10 Rated Funds in the sterling bonds asset group provide a blended or primary focus on all of these bond themes.