There has been a dramatic shift in the dynamics of bond markets, which could pose some challenges for investors next year.
Abhi Chatterjee, chief investment strategist at Dynamic Planner, said that markets were beginning to question why sovereign issuers should command lower borrowing costs than corporates with materially stronger balance sheets.
Chatterjee said: “The question of the moment from markets is: why I would pay more for a bond issued by a company holding $80bn on its balance sheet, than a government that has overborrowed by 124 per cent?
“It’s a question that irritates bond purists but it has come about because there is no credit risk difference. The bond investor is a brutal one, and given the high levels of debt, we are cautious.
While the market has seen spreads collapse for a long time, if that is broken down, they have not linked with corporate yields.
Speaking as a guest on a recent Dynamic Panner ‘Connected’ podcast, Chatterjee added: “They are at the same levels they have been since 2022.
“It’s the government yields that have pushed up, which has caused the compression. On that basis, the corporate bond market is much more stable than the government bond market.”
Meanwhile, Trevor Greetham, head of multi-asset at RLAM, the other podcast guest, argued that sovereign issuers had tools most corporates did not.
Greetham said: “At the moment, most companies are issuing debt in their home governments’ currencies. As governments control the currencies, they can, to a certain extent, manage inflation, credit stress and the economy through monetary policy.
“The question is whether, at some point, companies start issuing in crypto, the result being that governments have less control over. We are not there yet, but there could be a real decoupling if and when that does happen.”
Greetham is strategically cautious and tactically positive on the US equity market, but for bond markets, he is the opposite – tactically cautious but strategically positive on value grounds.
He added: “Bonds are offering a nice, positive, real yield, and as a result, we stepped up our strategic exposure from a very low duration stance pre-2022. That said, it doesn’t feel that we’re in the stage of the cycle where yields will drop a lot.
“If you look around the world for asset classes that are fair value or cheap, then UK equities, global government bonds generally and UK commercial property are neutral or cheap. Corporate debt and equities, particularly in the US, are super expensive. A portfolio should reflect this.”
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