Investment Grade Bonds Still Look Attractive
Investment grade corporate bonds are normally as dull as ditchwater. But 2009 proved to be an exception as fears of a global economic depression receded and investors reassessed the likelihood of corporate default.
“Last year was a historic year of performance [for investment grade bonds],” says Eric Takeha, a senior fixed income portfolio manager at Franklin Templeton Investments. “However, if you put it in context, in the sell-off of 2008 we reached valuations not seen since the 1930s.”
In other words, last year’s surge was a bounce back after plunging the year before. Investment grade bonds have just got back to normal.
This means Mr Takeha and other commentators expect these bonds to continue their run, albeit at a slower pace. “We have decent allocations to them in all our fixed income strategies and are still overweight in some,” he says.
Bonds are valued in terms of yield – the lower the price, the higher the yield. For corporate bonds the key figure is the spread, which is the difference between the yield on the corporates and the yield on government bonds that are considered “risk-free”.
In the wake of the financial crisis, spreads on corporate bonds widened to almost unprecedented levels as investors feared massive defaults. Spreads were also pushed out as banks sold corporate bonds in an attempt to clear risky assets from their balance sheets.
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