By Paul Read and Paul Causer | Mon 11 January 2010
Paul Read and Paul Causer, co-managers of the Invesco Perpetual Corporate Bond Fund comment on the outlook for corporate bonds as we move into 2010. This is the original, unedited version and should not be seen as a personal recommendation to invest or make any changes to your portfolio. Please note that Hargreaves Lansdown and Invesco Perpetual do not necessarily share his views.
Corporate bond markets are in a far healthier state than they were this time last year. Back then, we said that it was the biggest opportunity that we had seen in our careers and we are very pleased that corporate bond markets subsequently saw significant returns as they underwent a dramatic rally. Now though, in investment-grade markets, the opportunity has largely passed and there is less scope for capital gains in some areas.
Having said that, we do believe that, selectively, there is still value, it is just less prevalent and requires more circumspect credit selection. There remain sections of the market that continue to offer attractive opportunities. For example, yields on insurance and bank bonds are still over 6.5% in aggregate, while on the more junior bonds in the debt structure, yields are typically around 7%-10%. Bank debt has performed exceptionally well from the lows in March and there are many examples of bonds that have more than tripled in value. Nevertheless, despite the beginning of a recapitalisation of the banking sector and a better understanding of the risk of holding these bonds, we believe that there remains an opportunity for further improvement.
With banks unwilling to lend, 2009 has seen record issuance for investment-grade bonds. These new issues have been well received, demand has been exceptionally strong and the vast majority have subsequently increased in value. However, more recently coupons on investment-grade issues have been somewhat lower than those issued in the first quarter of 2009. Markets have become increasingly supportive of high-yield issuers. Recent offerings with coupons in the 9%-12% range not only demonstrate the level of income required by the market to support high-yield issues, but also provide the opportunity to add yield to portfolios.
Although it is important to stress that the exceptional returns from corporate bond markets in 2009 cannot realistically be repeated, opportunities remain and underlying conditions are still supportive. However, the days of equity-like returns from credit markets have passed and we expect more modest returns from corporate bonds in 2010.
