The corporate bond is back

We believe that corporate bond yields are close to an inflection point, with the high levels of yields achievable providing a buffer to further yield rises. In short – the corporate bond is back.

A landmark year for fixed income

Corporate bonds are a combination of risks – namely interest-rate risk and credit risk. These two have historically diversified each other, reflecting the role of central banks as a countercyclical force supporting the economy with rate cuts and quantitative easing. However, 2022 has been the first year in recent history in which a significant rate drawdown has coincided with a credit drawdown – an environment which we believe won’t last much longer.

Risk and returns

The reversal of this role in the face of rising inflation, as indicated by an unprecedented rise in real rates, has resulted in a selloff for both sources of risk. However, we are much more optimistic about the outlook for these two sources of risk, particularly when considered in tandem. We believe that real yields and consequently corporate-bond yields are at an inflection point with spread increases likely to countered by a drop in interest-rates, making us more sanguine about duration risk. Stronger initial corporate fundamentals and the relatively robust position of banks reduces the left tail for credit risk.

In our latest white paper, we examine the macro backdrop, and provide a forward-looking perspective, on both sources of risk, in order to make the case that the case that the corporate bond is back.

To read more, please download our white paper using the button provided.

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