There is a case for diversifying into global corporate bonds, according to Natalie Trevithick, head of investment-grade credit strategy at Payden and Rygel.
At a recent roundtable held by Payden and Rygel, Trevithick said the argument for diversifying a portion of the global fixed income portfolio from sovereigns into corporates was simple: excess return potential.
Trevithick said: “Last year and year-to-date, one to 30-year US corporates provide 80 basis points in incremental yields.
“Global corporates offer around 50 basis points. So, there's still good excess return to be had just with that incremental carry, especially when we view it to be relatively low risk.
“Even if we get a little bit of volatility and we'll see spreads widen out, as long as you have the conviction to carry your portfolio throughout these periods of volatility, we think you'll get that nice excess return in the end,” she concluded.
Doubt lingers around the global corporate fixed income sector, but Trevithick urged that investors believe, because yields are high – around 4 per cent in euro-denominated bonds and more than 5 per cent in US and sterling issues.
She added: “Central bank cuts have so far failed to materialise, keeping rates attractive for now, especially at the long end.
“Duration is your friend. So, while global central bank cuts may have been pushed back further in 2024, we still expect them to come, and in the meantime, you're clipping a nice coupon. Even if we only get two to three rate cuts in the year ahead, we're looking at total returns in the high single-digits.
“If we're pushing out the rate-cutting cycle further, that sets us up nicely for 2025/2026 with nice solid returns. You want to have that longer duration component within your portfolio.”
Publishing some of the details of the roundtable, in a note today, the Payden team noted the three key factors driving global corporate bond returns: fundamentals, technical factors, and valuations.
And despite the overall positive environment, the team also identified a number of risks it said it was tracking closely:
- As borrowing costs increase, default risk increases.
- Idiosyncratic credit risk – that is, factors that affect only one issuer – becoming more crucial in a tight spread environment.
- External risks, including the Covid-19 crisis, Ukraine war and the UK pension crisis, have roiled corporate bonds markets in recent years, and these events are by their nature hard to predict.
- Liquidity squeezes are another risk, as in the run set off by the UK pension crisis.
ima.jacksonobot@ft.com
