Capital Group sees plenty of bright spots for long-term investors in the corporate bond market. It has to do in the first place with the economic situation. The US asset manager points out that corporate bonds generally perform well in economic recovery phases. By the beginning of this year, most Western markets were full. Only the good bond development has come to naught due to the great concerns about inflation and the Ukraine war.
Based on macroeconomic data, the economy is still booming, especially in the United States. Although growth is flattening out in other countries, a recession is not yet in sight and there is certainly no sign of a wave of bankruptcies.
risk is avoided
According to Japanese fund manager Keiyo Hanamura of Capital Group, there are opportunities for both adventurers and risk-averse investors.
He advises the prudent investor to invest in bonds from companies that have already experienced several crises and are indestructible. The interest rate on these bonds is not very high at the moment, but it is at least more than you can earn with government bonds.
In Europe, the average yield on corporate bonds of investment grade has risen to 2%. That is double what an investor receives on an also very safe German 10-year government bond.
In the US, the average yield on bonds from the S&P 500 Investment Grade Corporate Bond Index is around 4%, compared to 3% that can be captured with a 10-year Treasury.
Investors with a longer time horizon can also safely take a little more risk, Hanamura says. Historically, there is nothing wrong with high-yield corporate bonds. Of course, it is wise to spread risks across multiple bonds.
The great thing, say Capital Groups Shannon Ward and Peter Becker, is that high-interest rates have risen sharply in recent years, not only in volume but also in breadth. For example, the telecommunications and media sectors are still strongly represented, but there are now also enough bonds available from companies in the financial sector, mining, the healthcare and pharmaceutical industries, technology, retail, real estate and the tourism industry.
The average quality of high-yield bonds has also improved. This is partly due to corona, which has meant that many quality companies had to borrow money temporarily to get through the crisis and received a credit reduction.
High yield is high return
The differences in coupon between high yield and government bonds and investment grade are really big. In the US, the yield on high-yield bonds from companies in the S&P index is now approaching 7%. Of course, it could go higher, which would mean a price loss, but in the long run, the outlook is good.
“The high interest rates allow for long-term returns similar to those of equities,” says Hanamura, pointing out that investors who allegedly invested in the Capital Group Global High Income Opportunities Strategy Fund in 1999 now had higher returns than investors who bought a basket of S&P 500 shares.
“The high interest rates allow high returns to deliver similar long-term returns as equities.”
According to Hanamura, investors should not be fooled by fears of sharp rate hikes by the Fed. According to him, this expectation has long been incorporated into bond prices. This also applies to government bonds, but with high yields it usually goes faster. That explains why the spreads have widened in recent months.
A final benefit that Shannon Ward and Peter Becker see for high returns is that these corporate bonds generally have shorter durations than investment grade and government bonds. For example, the average US high yield bond has a maturity of 4 years, compared to 9 years for investment grade. The advantage of this is that low-duration bonds are generally less sensitive to interest rate hikes at central banks.
High yields used to be more expensive
US adverse bonds fall to a low of more than two years ahead of the Fed meeting https://t.co/AgOiwHO0W8 pic.twitter.com/mcnObm3rOk
– Reuters Business (@ReutersBiz) May 3, 2022