Why bonds look an attractive bet right now

With inflation on the up, investing in bonds might not spring immediately to mind. But with good-value investments thin on the ground, there are still some appealing bonds to be found.

With inflation figures reaching worrying levels in the US, UK and Europe, not to mention most emerging markets where they look as though they are getting out of control, this might seem to be an odd time to be looking at bonds as an investment. Index-linked bonds have been popular for some time now because they protect investors from future inflation rises but they don't offer very compelling value at current price levels. However, fixed rate bonds now look appealing.

It has been difficult to find good value investments for some time, even though stock markets have fallen in recent months. The worst hit sectors of the main stock markets are financials and construction stocks, some of which have gone bust or been rescued by the State, such as Northern Rock and Bear Stearns, and where share prices have fallen over 60% in other cases. It is debatable whether these stocks represent good value because we are probably not near the end of the credit crunch yet, with problems in Europe and the UK still only just starting to unfold, and the property market is going to have to fight a lack of buyer confidence plus a huge oversupply in some areas for several years to come. They are cheap but for a good reason and they could struggle to grow earnings for some time.

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