At a Fundamentals briefing on Wednesday, Legal & General Investment Management’s Credit Strategist, Ben Bennett, explained why it’s worth keeping an eye on the corporate bond market in 2011, despite the handicaps of low government yields, compressed credit spreads, peripheral European sovereign risk and an investor base seemingly desperate to re-enter the stock market.
“Following such a stellar performance during 2009, many investors doubted the ability of corporate bonds to post strong total returns again in 2010, but that is exactly what happened," he says. "As we go into 2011, with a low interest rate environment constraining the returns in government bonds, corporate bonds can still offer a lower risk alternative to equities.”
At the briefing, Bennett argued that we cannot expect the returns of 2009 and 2010 again, acknowledging that these were years of extreme returns in corporate bonds but stressed nevertheless corporate could still offer investors value this year. He outlined that the incredible returns in the last two years arose as a correction of the dire conditions of 2007 and 2008 and that this could not be seen as an indicator of future performance in the asset class.
In addition, he argued that it was a good thing that corporate bonds were getting back to basics and that: “Although 2011 is not likely to offer spectacular returns, credit could still be attractive as an asset class due to the downside protection it offers from inflation, risks to growth and the issues surrounding peripheral European sovereigns.”
While the heavy corporate bond issuance of recent times should be more moderate in 2011 as companies reduce their reliance on bank funding, Bennett says: “The year should remain supportive for corporate bonds. In addition, by engaging in careful risk management in the run up to what could become a Spanish financing crisis, corporate bond investors can reduce the volatility of their investment, while positioning themselves to benefit if a longer-term solution is eventually found and risk appetite improves.”
