Eren Osman, managing director of wealth management at Arbuthnot Latham, is more cautious on the valuations of investment-grade bonds in aggregate.
He says that in the event of an economic downturn, those bonds would be sold by investors eager to move into government bonds or cash, causing the price of those bonds to fall, and he feels the income paid on those bonds right now is not attractive enough to mitigate the risk of price falls.
He says there are opportunities in some parts of the investment-grade universe, particularly in the bonds of financial companies.
One reason why there may be a valuation issue, according to Rhys Davies, fixed income fund manager at Invesco, is that whatever the demand for such bonds, there has been a relative lack of new issuance coming to market, which means those seeking to own bonds with an element of credit risk are almost forced to own the bonds already in the market, which is supportive of the price of those bonds.
Andrew Metcalf, head of fixed income at Close Brothers Asset Management, is very sceptical of the investment case for higher-yield bonds right now, saying the extra income available for the extra risk being taken is not attractive, particularly, in his view, as the yields on government bonds are quite high.
Although the yields on all bonds alters daily, the level of income paid from a bond, known as the coupon, does not change.
That means an investor can take credit risk to attain a higher yield, and not have to care about the movement in the price of bonds as the focus is just to collect the income, and be paid back 100 per cent of their capital when the bond in question matures, regardless of what price the bond had been trading at.
This latter is known as “pull to par”, and Craig Inches, head of rates at Royal London, says this approach makes sense for many clients in the current environment.
As mentioned above, one feature of bonds with a higher credit risk is that they tend to be shorter duration in nature, as companies or countries that are perceived to have a higher risk of defaulting are unable to raise longer-term debt.
This would more likely be a feature of the high-yield segment of the market, ie bonds that have been assigned a credit rating of below BBB.
David Roberts, fixed income fund manager at Nedgroup, says that while he regards the yields on offer on such bonds right now as very unattractive, he regards the short-duration exposure of that part of the market as being useful overall from a portfolio construction perspective.
