Shifting markets bring new opportunities for fixed income investors, particularly in corporate and securitised bonds, and still offers areas of value, according to Easton Vance.
The company said that the market rebound took many investors by surprise as did the deep dip that followed.
Vishal Khanduja, director of investment grade fixed income portfolio management and trading at Calvert Research and Management and Andrew Goodale, institutional portfolio manager at Eaton Vance Management said that investors had renewed interest in taxable, investment-grade (IG) corporate fixed income, which offered attractive valuations, strong liquidity and supportive technical market conditions.
Additionally, credit spreads remained wide, which would compensate investors for future fundamental and economic uncertainty.
“Over time, IG corporates have historically been shown to provide a stable, risk-adjusted return relative to the low risk of issuer default. Over the past 10 years ended March 31, 2020, IG corporates have returned 4.92%, as measured by Bloomberg Barclays US Corporate Bond Index, compared to 3.88% for the Bloomberg Barclays US Aggregate Bond Index,” they said.
“The historical average rate of IG issuer defaults ranges from 0% for AAA rated bonds to 0.16% for BBB, versus 0.61% for BB rated and 3.33% for B, for example.”
At the same time, hedge-adjusted yields also offered an attractive opportunity for overseas investors that hedge currency risk.
“Why securitised may shine? Unlike IG corporates, the securitised credit sector has been slower to recover in the second quarter. We see two reasons for this: First, concerns over consumer strength grew during the shutdown, calling the fundamentals of these bonds into question,” they said.
“Second, unlike other fixed-income sectors, there hasn’t been direct buying of securitised assets by the Fed, although the term asset-backed securities loan facility (TALF) program that is starting up should be supportive.”
However, the US Treasuries and US agency bonds would always have a role to play as “ballast” in any investor’s portfolio, according to Eaton Vance.
“But the return to extremely low levels of interest rates will mean that large defensive allocations will have a material drag on an overall portfolio’s yield. Also, the potential for a steeper yield curve in the face of rising deficits cannot be dismissed,” they said.
