IG credit could offer value in uncertainty: Western Asset
Investment grade (IG) credit could offer substantial value, even in the current uncertain economic environment, according to Western Asset.
Ken Leech, chief investment officer of Western Asset which is part of Legg Mason, said getting IG credit yields down was essential to ensuring the eventual transition to an economic recovery in the US.
“The investment-grade bond spreads have come down since their peak in March, but relative to implied default expectations we believe they still represent exceptional value,” Leech said.
Leech said as we had never experienced anything like the COVID-19 pandemic, it was important to rely on assets that could “weather” long and protracted periods of uncertainty, and IG corporate bonds could fit that bill.
“The psychology of fear and uncertainty has driven fixed-income risk-based assets to distressed levels,” Leech said.
“Avoiding risk while waiting for clarity may seem reasonable, but a quick recovery would leave you under-invested.
“Investing in higher risk sectors could bring substantial returns in the event of a near-term recovery but may not survive a period of prolonged economic weakness.
“This is the inherent uncertainty in today’s challenge – either a quick or prolonged recovery is possible.”
The CARES Act provided the US Fed with the ability to buy corporate bonds directly for the first time in its history.
“Many doubt whether the Fed will use this facility to continually support the market, as the European Central Bank, Bank of England and Bank of Japan have routinely done,” Leech said.
“There is also a thought that this program should be viewed only as a backstop. We, however, suspect that the Fed will use this authorisation strongly in order to improve financial conditions.
“Getting IG credit yields down is essential to ensuring the eventual transition to an economic recovery [and they] have come down in advance of every US economic recovery.”
US corporate yields as of 22 May 2020
Source: Bloomberg Barclays
According to FE Analytics, the best performing corporate bond fund was the CFS Wholesale Global Corporate Bond, which returned 9.44% over the last year to 31 May, 2020.
This was followed by Omega Global Corporate Bond (5.45%), Russell Australian Select Corporate Bond ETF (4.94%), Standard Life Investments Global Corporate Bond Trust Wholesale (4.75%) and BetaShares Investment Grade Corporate Bond ETF (3.44%).
The average return for all funds in the fixed interest diversified credit sector, Australian Core Strategies universe, was 2.49%.
Best performing corporate bond focused funds in the fixed interest diversified credit sector over one year to 31 May 2020
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