Core government bond yields are close to all-time lows, and corporate default rates are rising – where on earth can a bond investor safely find value these days?
Continuing problems in Europe, doubts about US and Chinese growth and turmoil in the Middle East are all generating uncertainty on a truly global basis. Markets hate uncertainty, and huge shifts in sentiment have occurred with frequent regularity recently.
Sadly, this has not impacted either money rates or government bond yields – for investors these still remain disappointingly low. So income remains a key requirement for all.
However, the good news is that although government bond yields are low, corporate bond yields remain significantly higher. The extra yield over and above government yields more than compensates for risk of default and will act as a cushion when government yields start to rise.
US corporates now look interesting – having outperformed last year, they have now cheapened up to their European counterparts after euro credits bounced in the first quarter this year. US growth is improving and the US financial system is in a far more advanced state of repair than Europe, so domestically focused corporates like cable operator Comcast, or the satellite TV operator Dish should be part of a diversified bond portfolio.
High yield corporates remain very attractive (keeping away from the European periphery) in this low yielding environment. If companies like Ford or Ziggo are not exciting enough, Ardagh Glass is still yielding 7 per cent or more, and closer to home, House of Fraser is yielding 11 per cent.
l Andrew Sutherland is head of credit and aggregate at Standard Life Investments