You are here: Home - Investing -

FCA warns over corporate bond fund risks

Written by:
The Financial Conduct Authority (FCA) has issued a fresh warning to consumers about the risks of investing in corporate bond funds.

Corporate bonds have been among the better performers in markets this year, with the average fund in the IMA Sterling Corporate Bond sector returning 5.5% over a year to 24 July.

However, the asset class has come under scrutiny over the past couple of years amid concerns about liquidity, and more recently over the risks of investing in contingent covertibles (CoCo) and Tier 1 bank debt.

In a notice published by the FCA today, the regulator highlighted the ongoing liquidity risks facing the sector.

“[Corporate bond] funds are not risk free and the risk factors associated with them should be taken into account when deciding if they represent an appropriate investment opportunity,” it said.

The FCA has identified three key risks associated with corporate bond funds, listed below.


“If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds,” the FCA said.

“This is because there is low trading activity in the markets for many of the bonds held by these funds – and the market for underlying bonds has shrunk in recent years.”

However, the regulator stressed these risks would only arise in ‘very extreme market’ conditions.

Interest rates

Although the Bank of England is still holding interest rates at ultra-low levels, expectations of a rate hike before the second half of 2015 are growing, and the FCA said this would have an impact on bond funds.

“Interest rate movements have an impact on corporate bond and fund unit prices,” the FCA said. “As interest rates rise, bond prices fall. This is the key difference to deposit accounts, where the capital value is constant.”

Company defaults

Although corporate bond funds mainly invest in bonds where the risk of default is low, the FCA also reminded investors company defaults can impact the level of returns generated by a bond fund.

“An unexpected default reduces income and the capital value of a bond holding,” the statement said. “Market expectations about economic conditions and the likely number of corporate defaults drive bond and fund prices.”

Tag Box

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

The savings accounts paying the most interest

If one of your jobs this month is to get your finances in order, moving your savings to a higher paying deal i...

Coronavirus and your finances: what help can you get?

News and updates on everything to do with coronavirus and your personal finances.

Everything you need to know about being furloughed

If you’ve been ‘furloughed’ by your company, here’s what it means…

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week

Read previous post:
Product launches of the week

ASDA Money's new 'pay for what you need' home insurance policy is just one of many new financial products on...