When compared with historical values and, in particular, with the periods following the financial crisis and the Covid-19 pandemic, the “all-in” returns of the investment-grade segment are currently high. That’s what emerges from an analysis by Alasdair Ross, Head of Investment Grade EMEA at Columbia Threadneedle Investments.
As is known, the return from investment grade securities can be divided into two main parts: on the one hand, the return of the underlying government bonds and on the other hand, the credit spread, which represents the excess return. Corporate credit risk In this context, it is government bond yields that are particularly high, while credit spreads appear relatively narrow. Regarding prevalence, a note of caution should be expressed. Although the company’s fundamentals are very solid, valuations add up to near perfection given the current level of spreads. So, if the earnings or macroeconomic environment is disappointing, we may see a bit of a widening in spreads.
“At this time – underlines Ross – we believe it is advisable not to overload the credit allocation. The current credit spreads reflect the strong fundamentals of the issuing companies. However, since we have negative There is no protection mechanism in case of events, so it is prudent to exercise caution and avoid excessive credit risk in portfolios.
Duration in a world of low rates
Recent decisions by central banks to cut interest rates have made tenure a more attractive option for investors. If these cuts continue, we could see a steepening of the yield curve in 2025. In the short run, yields are expected to decline in response to central banks’ monetary easing programs. However, for maturities of ten years and longer, yield declines are not observed, as markets reflect concerns about fiscal deficits and add a risk premium. Despite these concerns, the environment remains favorable for the period. Over the past two years, investors have reaped attractive returns from cash. As rates fall, it may be beneficial to move to longer maturities and take on slightly longer duration risk to take advantage of the returns offered by the long-duration segment. This strategy may prove profitable in the current context of falling interest rates and stabilizing inflation.
What are the chances of spread?
“We don’t foresee a significant increase in credit spreads, at least in the short term, and that’s mainly because corporate fundamentals are very solid right now,” says Columbia Threadneedle Investments. Corporate leverage is at decade lows, while globally, bank capital is at historic highs. Moreover, asset quality should remain low, a possible recession , corporate profits boom In a recession, we would expect investment grade to hover between 170 and 190 basis points rather than 100 basis points relative to government bonds. Stay down, as it is now, we do not foresee a recession scenario Flexibility is how to navigate such an environment, meaning that, even in the face of economic hardship, companies can adapt and better manage their financial resources and strategies to meet any future challenges. can.”
A favorable context for investors
Currently, the overall return on investment grade securities looks attractive, with a cumulative rate of return of 4.5% and a long-term IG rate of return of 5.5% to 5.9%. This type of return is especially attractive when compared to the long-term return of stock markets, which is between 7% and 8%. “So,” Ross continues, “if we can get a 5% return from investment grade bonds, which occupy the top end of the capital structure and have significantly less volatility than the equity markets. are victims, so it will be highly competitive. Although in the short term we are a bit cautious about taking the spread risk that we are launching, over the long term and over the long term, we believe that investors will Can achieve additional expansion are, represented by excess yield. The excess return offered by an asset class with much stronger fundamentals than government bonds, combined with historically equity-like total returns, for these investors. creates a favorable environment for those who can continue to hold credit and invest in this asset class, and take advantage of the exciting opportunities in the bond market.”
“Overall,” concluded the head of investment grade EMEA at Columbia Threadneedle Investments, “our outlook for investment grade corporate bonds remains positive, particularly in the slow economic context and future easing by central banks. With expectations of interest rate cuts, this scenario could, in fact, further support returns and improve investment performance in the segment.”
