Demystifying the oddness of corporate bonds

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Opinion

The bond market can often seem like a mysterious world for stockpickers. While equity sell-offs are often attributed to emotional reactions, bondholders selling can be seen as a calculated move or a way to exert pressure on issuers. The government bond market holds significant power, as the chancellor is ultimately answerable to bond buyers, who determine the willingness to support a fiscal program.

Navigating the world of bonds requires a deep understanding of various fields, from politics to economics. Unlike stocks, bonds offer stability and lower risk in a portfolio, making them an attractive investment option. Corporate bonds, in particular, present unique challenges in pricing, as they are influenced by factors such as supply and demand, cash returns, and risk.

The current trend in the corporate bond market is the tightening of spreads above risk-free rates, leading to decreased rewards for investors. Despite this trend, many investors are looking past thin credit spreads and focusing on the yield to maturity. With interest rates expected to fall, locking in profits over a longer period may outweigh the increased duration risk.

High-grade corporate bonds are becoming increasingly popular, as investors seek low-risk real returns in a growing economy. However, the relationship between corporate bonds and government bonds on the yield curve is shifting, with some corporate bonds yielding more than equivalent government bonds. This raises questions about the traditional assumption that sovereigns should always carry a lower yield than corporates.

While the perception of government debt as lower risk persists, rising sovereign debt levels and government spending commitments may challenge this notion in the future. Despite this, investors like Ben Lord believe that government debt will continue to be perceived as lower risk compared to corporate debt. The bond market remains complex and ever-evolving, offering both challenges and opportunities for investors.

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bonds, corporate, Demystifying, oddness

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