Corporate bonds remain better value than government-backed bank debt, says Fidelity International.

Despite billions of pounds of new government-backed bank bonds entering fixed-income markets, Ian Spreadbury, portfolio manager of Fidelity International's Sterling Bond Fund, says he still backs corporate bonds to provide long-term investors with better value.

Government-backed bank bonds are a new phenomenon, based on the unprecedented government bail-outs of banks in September 2008.

The first of these new issues came from Barclays in late October and this has since been followed by HBOS and RBS.

Fidelity's Sterling Bond Fund invests in both government bonds and corporate bonds, but Spreadbury explains that he sees most value in the latter at present.

‘On the face of it, government-backed bank debt is an attractive proposition – in very simple terms they are gilts with a slightly higher return. These new bonds sit right at the senior end of a bank's capital structure, which is the most protected part.

‘However, most of these bonds have short maturities of under three years, and I feel there is more value at the longer-dated, more junior lower tier two bonds where yields are around three per cent higher, but I still receive adequate levels of protection.’

Spreadbury points out that yields across the whole Sterling corporate bond market are around nine per cent at the moment and many prices are at historic lows.

He says, ‘Both are off their long-term average so investors who move into corporate bonds will now see an unusually high yield with the prospect of capital appreciation over the medium to longer term. On this basis I am happy to maintain an overweight in corporate bonds at the expense of gilts.’