Corporate bonds

Do headlines make corporate bonds attractive?

Sponsored Content by Vaughan Rhymerinvestment director at Rathbone Investment Management Internationalexamines how inflation has led to growth in government bond yields

Many headlines pointed out that Treasuries and gilts (US and UK government bonds, respectively) had one of their worst starts to the year on record. In the sterling market, investment grade corporate bonds, issued by non-government institutions, performed similarly, but were also hit by a significant increase in the extra yield they offer relative to bonds. to compensate investors who take default risks.

The reasons for the sharp rise in government bond yields (and therefore the fall in bond prices) this year are well documented. Inflation is at levels not seen in decades and is proving more persistent than expected.

With inflation data repeatedly higher than expected, investors have shifted their expectations of how quickly rates will rise and how far they might rise.

This caused government bond yields to rise across the curve, with corresponding downward price movements.

Despite the significant fall in gilt prices since the start of the year, and while we cannot be certain that their yields have peaked, current IG levels suggest there is now value in corporate bonds. When we look at the fundamentals of most companies issuing IG debt, overall they are in good shape: they are not overburdened with debt and their earnings are strong enough to comfortably cover interest payments arising from this debt.

For investors with a medium-term investment horizon, we believe now is an attractive time to add some exposure to the asset class to take advantage of its higher yields and fixed income flows.

With the movements seen since the start of the year, we believe investors are now getting attractive rewards for the risks associated with IG corporate loans with annual returns of up to around 4% available in high quality companies.

At the same time, adding certain asset classes to overall investment portfolios could help reduce volatility.