EUROPE – The median European fixed interest fund for each of the main investment sectors rose by three percent over the first half of 2003, says Standard & Poor’s.

“European fixed interest markets continued to record healthy returns over the first half of 2003,” S&P said in a new report in the sector.

It said, according to interviews it had conducted recently, fund managers remain optimistic. It said they believe that slow economic recovery in Europe, aided by low inflation, will continue to provide a “positive background for investment in the sector”.

The report follows a report from Merrill Lynch this week that found that global fund managers, having dramatically changed their views on interest rates, have gone sharply in bonds.

S&P says that gains in the central and eastern European markets have stalled in recent months as local currencies have weakened against the euro. “Despite this setback, advocates for this region remain positive, either maintaining their weightings or even in some cases raising their exposure.”

According to S&P, lower rated corporate bonds are a “prime driver” for performance in recent months. Interest rate spreads between corporate and government bonds have narrowed to end the latest quarter at near historic "tight" levels, it said.

The report says managers have taken advantage of this trend, by investing lower rated securities in former “out-of-favour sectors” like telecoms.