Fixed Income  

Credit markets a ‘sweet spot’ in hunt for income

Credit markets a ‘sweet spot’ in hunt for income
 Credit: Chris Ratcliffe/Bloomberg

Corporate bonds are a “light in the income darkness” as fiscal and monetary policy continues to support companies throughout the ongoing coronavirus crisis, according to a fixed income fund manager.

Speaking at the Morningstar conference today (November 16), Janus Henderson’s Jenna Barnard said company credit sat in a “sweet spot” and looked “well supported amidst a very difficult winter” for income.

She said: “Unlike the previous two big financial crises in 2001 and 2008/9, this particular crisis has had a very benign impact on corporate bond markets.

“This is courtesy of policy makers, central banks and fiscal support, which has meant we’ve had very few defaults in the corporate bond market and outlook remains positive.”

Income investors have had a challenging year as government bond yields fell to record lows and dividends from equity markets dried up as companies looked to protect their balance sheets.

The UK 10-year government bond has a yield of 0.34 per cent as of today, while the FTSE now yields around 2.5 per cent, according to Janus Henderson.

But in corporate bonds, Ms Barnard said investors could see yields at just under 2 per cent for triple-B rated bonds and up to nearly 4 per cent for high yield, BB-rated products.

She added: “Credit is always the asset class to buy first in the recovery phase of the cycle. 

“This is because it takes longer for companies to turn dividends back on, but credit is always looked after on balance sheets. Creditors are prioritised over equity investors.”

Ms Barnard said the corporate bond market had surprised the industry at just how low default rates had been.

At the start of the crisis in March, analysts were forecasting default rates of up to 14 per cent for US high yields and a similar level for European corporates.

But the reality had been “very very different”, Ms Barnard said, as defaults in Europe were at around 3.5 per cent and were “peaking”.

She said: “There almost hasn’t been a default crisis in the high yield corporate bond market. We’ve had pockets of problems but not a general, cross-sector default story.

“This seems to get missed in the doom and gloom, but is due to government support.”

Ms Barnard also predicted the support from policy makers and central banks would continue throughout the crisis, with finance ministers from both Germany and France pledging to provide support for affected businesses.

She said: "Income is likely to remain a challenge for many clients for years to come. 

"Consensus has finally come round to the fact that rates won’t be going up, which is a sobering outlook for people looking for income.

"Credit sits in a sweet spot, where leverage levels look normal for a recession or downturn, interest cover looks relatively good and even in riskier parts, total return has been good whereas for equity investors, dividends have been a wasteland."

imogen.tew@ft.com