Corporate bonds can boost returns: FSI

With Government bond yields at record lows, investors are using corporate bond yields to boost returns within their fixed income portfolios, according to a report from First Sentier Investors (FSI). 

The Global Credit Outlook 2021 report said that prevailing economic conditions should underpin credit demand going forward. 

Craig Morabito, FSI global credit team senior portfolio manager, said as government bond yields remained low, income-focused investors were looking up the risk spectrum.  

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“The traditional barbell approach of higher-risk equities and lower-risk government bonds doesn’t replicate the risk/return characteristics of global credit markets,” Morabito said. 

“Adding corporate bonds to a portfolio can therefore provide additional income without adding significant risk. 

“In today’s market, companies want to issue bonds and investors want to buy them. Global corporate bond markets enjoyed nearly $300 billion of inflows in 2020. 

“That’s a record level of demand, and companies tapped into it by issuing record volumes of new bonds to bolster their balance sheets.” 

The paper acknowledged current returns were subdued and it said they should be considered alongside other defensive assets. 

“The current prospective income of around 2.3% p.a. from investment grade credit may not get investors’ pulses racing, but government bonds are yielding less than half that in most markets,” Morabito said. 

“Additionally, we believe there is room for valuations to improve, even beyond the strong rally already seen in the asset class. 

“Credit valuations are more attractive in some areas of the market than others, so there is scope for active managers to allocate strategically to regions and sectors that are most attractive from a risk/return perspective.” 

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