Credit spreads between corporate bonds and government bonds have widened significantly this year, said Adam Ditkofsky, portfolio manager and vice president of CIBC Asset Management, even as corporate earnings remain strong.
“The weakness was primarily a reflection of a reduced appetite for market risk and not a deterioration in credit fundamentals,” Ditkofsky said in an interview last month.
Bond yields have risen sharply this year as markets grew increasingly concerned about inflation and central bank policy error.
Much of the weakness is in short-term financial company bonds, which are among the highest quality corporate bonds in Canada, he said. A five-year senior bank bond recently traded 150 basis points higher than a Government of Canada bond, nearly double what it was at the start of the fourth quarter of 2021.
“That’s normal,” he said, “as investors look to sell their most liquid corporate bonds when the market becomes stressed.”
US bond valuations also look more attractive, Ditkofsky said, but he’s also cautious about further widening the spread.
“High inflation, the war in Ukraine, potential Covid variants and the risk of policy error from the Fed or the Bank of Canada could all cause spreads to widen, so we are careful what we add,” he said.
Ditkofsky favors short-term corporate bonds, as they are less sensitive to rising interest rates, and the financial sector in particular, which has already “experienced a significant widening” and is the most liquid part of the Canadian market. corporate bonds.
“You get close to 4% on some of the highest quality corporate bonds available in Canada,” he said.
He also pointed to Canadian energy companies such as Suncor, Cenovus and CNQ which are benefiting from rising commodity prices. Overall, he said, as long as companies still have pricing power and the economic landscape remains stable, the corporate bond market will continue to outperform. “It’s not without risk,” he said, but much of the enlargement has probably already happened.
Ditkofsky said the high yield market is a different story. High yield spreads haven’t moved as significantly, so “the sector hasn’t depreciated as much.”
However, he said there were still some upsides to owning this sector, such as a low correlation to the broader bond market, but “the focus should be on bottom-up analysis.”
This article is part of the AdvisorToGo program, powered by CIBC. It was written without the contribution of the sponsor.