The return of a more stable growth environment should provide support for corporate bonds, according to David Leduc, manager of the BNY Mellon Global Strategic Bond Fund.
The return of a more stable growth environment should provide support for corporate bonds, according to David Leduc, manager of the BNY Mellon Global Strategic Bond Fund.
Leduc says stabilising growth is creating the ideal climate for corporate bonds.
‘When the risk premium for such bonds is at historic levels, the flood of cheap credit provided by central banks will only help sustain the appetite for such assets. Investment grade bonds in particular continue to offer compelling rates of return in a historical context,’ he says.
According to Leduc, the outlook for high yield bonds remains very attractive, despite the lingering spectre of rising default rates. Although the default rate is estimated to reach or exceed 12 per cent, this is less than the 15 per cent previously forecast by the market, as increased debt restructuring and the improving health of banks and the bond market avert many potential defaults.
‘This sort of environment is naturally less favourable for government bonds, given the significant borrowing needed to fund fiscal stimulus and falling government revenues. With interest rates expected to stay within their current range, there is not a great risk of long bond rates rising strongly,’ Leduc says.
Nevertheless, Standish is watching carefully the developments in sovereign bond markets and will continue to discriminate on a country basis. For example, while it remains comfortable investing in selected sovereign bonds, it is careful to avoid markets where the investment case is less convincing, such as Ireland, where its struggling economy has seen its government debt downgraded. It also remains attracted by those emerging economies such as Brazil and Peru which have proved to be relatively immune from external upheaval and continue to offer attractive opportunities.
Lecuc adds that the global banking system needs to continue its deleveraging process as years of unprecedented levels of cheap borrowing now require deflating.
‘However, the conundrum faced by governments is that deleveraging is unlikely to be positive for growth, although it should at least help to improve stability,’ he says. ‘Furthermore, these conditions should continue to favour fixed income funds as they help create a world where bonds can be expected to trade in relatively narrow ranges. With western policy rates likely to remain on hold, we can also expect the yield curve to remain steep for some time.’
