“Overall, the corporate bond market remains very active and healthy,” said Adam Ditkofsky, portfolio manager and vice president at CIBC Asset Management, in an interview last week.
Corporate bonds continued to outperform the broader Canadian bond market in the first eight months of the year as companies benefited from the economic recovery, Ditkofsky said. For the period ending August 31, corporate spreads remained relatively stable, ranging from 110 to 124 basis points and ending the period at 116 basis points.
High-yield bonds also benefited from the reopening of the economy, yielding 4.5% year-to-date through August, he said, with spreads dropping 380 points. basis at 315 basis points. According to Ditkofsky, corporate issuance has been strong due to healthy investor appetite, registering a 13% year-over-year increase and hitting just under $100 billion year-to-date. ‘year.
“We can easily see 2021 become the highest emission year on record if levels stay elevated,” Ditkofsky said.
Fitch Ratings has lowered its forecast for the default rate of US high yield bonds as issuer fundamentals improve.
The impact of the next wave of Covid-19 on the corporate bond market hinges on the uptake and effectiveness of the vaccine against the Delta variant and potentially other mutations, Ditkofsky said.
Key metrics to watch are hospitalizations and intensive care unit capacity, which have forced governments to impose lockdowns and restrictions in the past, reducing mobility and ultimately hurting the economy.
“Now I hope that doesn’t happen again and it shouldn’t happen, given that a large majority of the Canadian population has been vaccinated,” Ditkofsky said.
However, if further Covid-19 restrictions were needed, he warned credit spreads could widen. High yield bonds would also underperform in this scenario, especially in sectors most sensitive to economic reopening, such as leisure and travel.
Ditkofsky also warned that peak GDP growth is likely past and growth will return to a more normal pace. Much of the rally has already been priced into the bond market.
“The easy money has already been earned as credit spreads have increased materially from their spreads seen earlier in the pandemic,” he said.
Either way, Ditkofsly said the fundamental backdrop remains intact with strong corporate profitability and well-capitalized balance sheets, so corporate bond yield spreads are unlikely to return to the levels seen at the start of the year. the pandemic.
“We continue to believe that corporate bonds will outperform government bonds over the next 12 months,” Ditkofsky said. “And it’s a similar story for high yield.”
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