In the world of financial reporting, the spotlight often brightly shines on the stock market, with much of the mainstream financial media dedicating vast swathes of coverage to its ebbs and flows. However, lurking in the shadow of this dazzling array of stocks is the less glitzy, albeit equally significant, corporate bond market. This market encompasses an array of financial instruments, from securitised products to municipal bonds, yet it appears to be somewhat overlooked, leaving a noticeable gap in information accessibility for smaller advisors and individual investors.
Traditionally, the corporate bond market has been the playground of institutional investors. Major mutual fund corporations alongside heavyweight sell-side firms such as Goldman Sachs and Morgan Stanley have typically dominated this space. This institutional bias has inadvertently created a barrier to entry for smaller players in the game, rendering the corporate bond market somewhat esoteric to the lay investor.
However, the quest for “relative value” analysis within corporate bonds remains a valuable endeavor, not necessarily for the direct purchase of individual bonds for clients, but for broadening one’s perspective on corporate credit. Such an understanding is crucial, especially when it comes to engaging in informative discussions with clients about their investment options.
Remarkably, resources are cropping up that aim to bridge this information gap. The St. Louis Federal Reserve, with its array of spread-related charts, and the Intercontinental Exchange (ICE) with a newly minted website dedicated to corporate, structured, and municipal bonds, are starting to shine a light into this previously shadowy corner. These platforms, particularly if ICE continues to evolve its offering with enhanced commentary and insights, could herald a new era of democratized access to corporate bond market data.
A supplementary beacon of clarity in this realm is S&P Global Ratings. An interesting graphical representation from their early June 2020 default study depicts the default rates, providing invaluable insight into the health and risk associated with corporate bonds.
In an effort to offer a vivid illustration of the dynamic nature of the corporate bond market, since late March 2020, a spreadsheet detailing “Year-To-Date returns” for various corporate bond funds utilized for clients has been diligently updated every Saturday morning. This practice underscores the noticeable improvement in returns for these funds since the onset of the COVID-19 pandemic, exemplifying the market’s resilience and adaptability.
Among the standout performers is the Blackrock Strategic Income Opportunities Fund, which, under the stewardship of Rick Rieder, Blackrock’s fixed-income Chief Investment Officer, has navigated the tumultuous waters introduced by the pandemic with notable aplomb, charting a positive return Year-To-Date.
Recent discourse, such as the weekly Bespoke Letter published on June 19th, 2020, has delved into the improvement in credit spreads, placing them in a historical context to elucidate the current market dynamics. The evolution of corporate credit spreads is highlighted, emphasising the pivotal moments of improvement witnessed during the 2008-2009 financial crisis and the recent upturn in March-April 2020. It’s depicted how, by merely waiting for positive economic and default data improvements, one might miss significant portions of potential returns in corporate bond funds.
In reviewing the 2020 landscape, the full picture of corporate bond default rates will only emerge in hindsight. The exploration into the corporate spread details suggests that waiting on the sidelines for a turn in economic data or Federal Reserve policy shifts may lead to missed opportunities in harnessing potential returns from corporate bond funds.
Fed Chair Jay Powell, during last week’s Federal Reserve meeting, hinted at the likelihood of keeping interest rates near zero until 2022. This forecast hinges significantly on the outcomes of the 2020 Presidential election and the subsequent composition of Congress, highlighting the intertwined nature of fiscal policy and financial market dynamics.
In personal finance strategies, there remains an ongoing debate about the value of Treasury bonds, especially in an environment where their yields, at mere basis points, are compounded by the negative real returns when adjusted for inflation. Despite these low nominal yields, Treasuries have historically acted as a safe haven during market downturns, evidencing negative correlation to the stock market.
Looking ahead, the allure of corporate credit risk continues to be promising for the forthcoming 3 – 6 months, signalling an opportunistic window for investors.
In closing, it’s paramount to approach the opinions and analyses presented in financial blogs with a healthy dose of scrutiny and aligned with one’s financial profile. The dynamic and sometimes unpredictable nature of financial markets warrants a cautious but informed approach to investment strategy planning.
Acknowledgments are due for the collaborative spirit within the financial blogging community, as evidenced by the exchange and discussion of ideas that invariably enriches the collective understanding of market dynamics.
