In the eurozone, consumption and investment have fallen sharply, while hard economic data remains very weak. Insight Investment expects eurozone GDP to fall around four per cent this year and to barely reach positive territory in 2010. Inflation will also remain well below the European Central Bank's two per cent target. The fragile state of the region's major economies is enough to ensure official rates remain anchored, and officials have indicated that these are now appropriate for some time. Increases in government spending are only having a modest effect so far.

These factors could be considered as a rather negative background for corporate bonds, but Insight Investment believes this will be far from the case. The recent improvement in corporate lending conditions has meant that Insight Investment has reduced their forecast for defaults within the corporate bond landscape. While defaults are still expected to be high, the outlook is for a recession rather than a more serious depression. Although growth will remain subdued, the rate of decline is expected to slow.

Insight Investment favours bonds issued by industrial companies, particularly metal and mining companies. These companies have been bolstering their finances by cutting their expenditure and raising new money by selling shares. These moves are very positive for bondholders. Insight Investment has also been active in the market for newly-issued bonds, taking advantage of the quality names being offered to investors at attractive prices.

Many of these bonds have performed very well after issuance, and Insight Investment has been tactical in selling some of these names to lock in profits. In addition, the funds have been monitoring the progress of bonds which have fallen to distressed levels. The fixed income team has researched these names, selecting the ones where they believe the market's fears are overdone, and bought into the bonds where the company is solid and expected to be able to meet its obligations to bondholders.

In keeping with the strategy across all Insight Investment's credit funds, a major focus of the La Valette Euro Income Fund and the La Valette Monthly Income Fund for some time now has been an exposure to bonds issued by financial companies. Within the financial sector, the funds have preferred to own the "senior" bonds issued by selected banks, as recommended by Insight's team of credit analysts.

Bonds from banks and similar institutions are ranked by seniority, with senior bonds the least risky, but offering relatively lower yields, while more "subordinated" bonds are higher-risk, but offer higher yields. More recently, given the renewed strength in the market, Insight Investment has been taking profits on some of the senior bonds in the fund and adding more risk by adding subordinated bonds from the better-quality issuers.

Within corporate bonds, there has been a significant improvement in confidence in recent months. Sentiment in the market, which was very poor last year, has improved significantly, a factor which has bolstered returns for investors in the last four months.

While the market probably has room to rally further, more realistically Insight Investment expects to see a period of consolidation. The market is likely to trade within a range, as opposed to regaining the pre-credit crunch highs. However, given the higher yields offered by these securities, the market need only remain stable for corporate bonds to outperform their safer government bond counterparts. The investment objective of the La Valette Euro Income Fund and the La Valette Monthly Income Fund is to aim to achieve a reasonable level of income through investment in a diversified portfolio of securities, consisting principally of debt instruments while also seeking to achieve capital appreciation.

Managed by Valletta Fund Management, the La Valette Euro Income Fund aims to distribute income every quarter. Valletta Fund Management Ltd, Bank of Valletta's fund management subsidiary, is a joint venture between Bank of Valletta and Insight Investment.

Ms Speake is fund manager of La Valette Euro Income Fund and La Valette Monthly Income Fund at Insight Investment Management (Global) Ltd.