In search of yield
After a long period in the wilderness, the bond market is regaining its appeal. The return to favour of this asset class signals a paradigm shift resulting from the monetary tightening that began 18 months ago. As the financial community begins to factor in disinflation, corporate bonds are enjoying greater appeal. The situation has indeed changed, and rarely has the opportunity to return to this asset class, neglected in recent years, been so clear.
The European Central Bank’s key rates are at their highest since the creation of the euro: the long end of the curve is currently at 2.9%, like the French 10-year rate, which even touched 3.6%[1] a few weeks ago, as it did in 2011. But this is only part of the equation. The renewed appeal is also attributable to the rise in risk premiums. Indeed, it is the tension between the two factors that drives carry, or the actuarial yield.
This rise in risk premiums shows that the markets expect default rates to rise over the coming few years. They have been in a deep slumber for the last decade, at around 1% to 2% a year in the high-yield universe. But the real question is, what level will they reach? While the scenario of disinflation without a major economic crisis is becoming central, corporate bonds could benefit from a positive effect on two fronts, the easing of rates and risk premiums combined with the return of a high level of carry.
The yield on investment grade corporate bonds – those whose issuers are in good financial health – is around 4% (“A” rating), up from 0.4% at the end of 2021. Meanwhile, yields on high yield debt are running at around 6.5% and those on corporate hybrids – subordinated bonds issued by non-financial companies – at over 6%.[2]
Entry points to seize the new opportunities are to be found in both the Investment Grade and High Yield universes. This diversity makes it possible to build portfolios with varied risk/return profiles.
Stimulated by the opportunities arising after years of scarcity, and as demanding as ever in terms of issuer quality, our bond funds benefit from over 15 years of expertise, enabling them to take advantage of this new era.
Echiquier Credit SRI Europe[3] is an SRI-labelled[4] bond selection fund invested mainly in eurozone corporate and financial debt. It offers diversified sources of performance thanks to a broad range of securities, and benefits from active and flexible management of interest rate exposure.
Even when the winds are favourable, know-how comes first. In bonds as in equities, selectivity remains the order of the day.