Bonds are back on the table as value emerges
The first half of 2022 was a bracing period for investors, with equity and bond indices registering...
“I said that 2008/2009 was a once in a career buying opportunity. I lied. We have another one.” – Stephen Snowdon, manager of Artemis Corporate Bond
“Bonds are the bargain of the century.” – Gregoire Mivelaz, co-manager, GAM Star Credit Opportunities
“Investors should be hoarding credit like they’re hoarding toilet rolls.” – Chris Bowie, manager of TwentyFour Corporate Bond
“It’s probably the best value investment grade market I have seen in my career.” – Ben Edwards, manager of BlackRock Corporate Bond
All eyes have been on stock markets recently – watching the savage falls and then looking for signs of a rebound. Few people have been focused on the fixed income markets.
But when we at FundCalibre hear bond fund managers talking like this, we sit up and take note.
We’ve spoken to a huge number of Elite Rated fund managers over the past few weeks and what is abundantly clear is that bond fund managers believe that, for the first time in a very long time, their asset class is looking extremely good value.
Following the global shutdown, bond prices have fallen to significantly low levels. As prices have fallen, yields have increased significantly and, for the first time in many years, investors are being compensated for taking extra risk on corporate bonds.
At a time when cash interest rates are at rock bottom and dividends are under pressure, the increased yields on bonds could be very attractive.
For active managers able to discriminate between those companies with sufficiently strong balance sheets to be able to survive the next few months, and those that face extreme hardship and possibly bankruptcy, the opportunities have opened up nicely.
“Prices have fallen so much that valuations now suggest one of the strongest buy signals for a number of years – bonds could even be the bargain of the century.
“Importantly, 2020 is a corporate crisis, not a banking crisis. In fact, the role of banks is crucial for the recovery. In 2008 they were part of the problem, today they are part of the solution. They can help companies survive and even bounce back. I believe banks are the safest place to be today, after sovereign debt.”
Listen to what Gregoire’s colleague, Jeremy Smouha, had to say in our recent podcast
“Intervention from central banks has put a floor under the market – but not before we saw largest drawdowns ever seen in some markets. We then had a week of the largest investment grade bond issuance of all time: $230bn for the month of March. That’s 30% higher than past record.
“It’s probably the best value investment grade market I have seen in my career. The outlook is looking excellent medium to long-term.”
Listen to Rathbone Ethical Bond co-manager, Noelle Cazalis, talk about new COVID-19 bond issues
“I said that 2008/2009 was a ‘once in a career’ buying opportunity. I lied. We have another one. The initial sell-off was indiscriminate and all bonds went down together, but this has created opportunity. Companies started issuing new bonds thick and fast and we were able to sell some riskier bonds to buy higher quality replacements.
“You’d think doing that would involve a big drop in yield, as there is less perceived risk involved, but no. The first two deals came so cheaply we could improve the quality of the holdings in the fund without dropping too much in credit spread.”
“Investors should be hoarding credit like they’re hoarding toilet rolls. Don’t get me wrong – we certainly expect a raft of downgrades across swathes of fixed income, but we do not expect an Armageddon scenario either.
“The huge extent of the government support in response to COVID-19 in our view mitigates some risks, at least for sensibly run companies with what we would regard as acceptable levels of leverage. For more levered companies or those with more questionable asset quality, our outlook is materially different. We expect to see a significant increase in high yield energy, travel, and leisure defaults, for example.”