Bond investors need to be flexible and keep diversification top-of-mind amid an uncertain economic outlook and jittery market sentiment, according toIan Spreadbury, manager ofFidelity International’s Strategic Bond Fund.

“Today we are experiencing a supply-side shock via higher commodity prices,” says Spreadbury. “Nevertheless, for this to morph into a serious long-term inflation problem, I believe wages will need to rise significantly. I do not envisage this happening in the near term with unemployment at such a high level, allowing headline inflation to subside by 2012.”

Although interest rates remain very low, there is uncertainty over future developments, as the current upward-sloping yield curve in the UK implies higher interest rates in the future, Spreadbury notes.

“I do not envisage a significant hike in interest rates for some time, and for that reason I have maintained my long-term duration position at around six years,” he says.

Therefore, as investors face a fragile and “potentially precarious” environment, he argues it is essential to have a flexible approach to asset allocation and continue to be well-diversified in bonds to take account of the many challenges which lie ahead.

“I continue to find the best value in investment grade bonds, having a preference for defensive sectors, such as transport and utilities.  A flexible approach is vital for positioning the fund to take advantage of these opportunities, while diversification also helps to drive long-run performance,” says Spreadbury.