The Capital Group Inc Singapore - Seeking Returns in Any Market Environment
The Capital Group Inc Singapore - Seeking Returns in Any Market Environment
Why should investors consider investment-grade corporate bonds in the current environment ?
Investment-grade ( BBB / Baa and above ) corporate bonds can be an excellent asset class for long-term investors .
The primary investments are bonds issued by large , well-known US companies . Beyond the diversification benefits , these bonds typically earn a return above Treasuries over a long period of time .
Moreover , they have done so with lower volatility compared with riskier assets such as equities or high-yield bonds and can help provide capital preservation .
We believe that the US investment-grade market looks particularly attractive given the higher yield compared to low domestic yields in most Asian markets .
Additionally , the broader opportunity set and the deeper liquidity of the US credit markets provide both strategic and tactical investment advantages .
There is also the added benefit of a lower correlation with global equity markets . If global investors have the capability to buy unhanged risk , even if US interest rates rise modestly , they could benefit from a stronger dollar .
Even in hedged cases , global investors can pick up 80-150 basis points depending on the structure , credit quality and maturity of the bond .
How do you currently see valuations within the asset class ?
Fundamental valuations are fair . Although spreads seem somewhat attractive compared with historical levels , if we look at the leverage in the broad corporate bond market , it is at or has exceeded the peak levels of 2007 .
However , while leverage is high , the cost of debt service is muted and manageable because of the low absolute level of yields .
Interest rates are so low that the average coupon paid is half of what it was 10 years ago . Thus , almost all higher quality companies are in a much better position to service their debt . It is also important to note that US banks are in much better shape than they were in 2008 as they have now increased their Tier 1 capital , and balance-sheet strength is strong and proprietary risk-taking reduced .