Government bond market yields are expected to remain relatively low over the next 12 months, although there is potential for a slight sell-off, according to Insight Investment’s fixed income product specialist Alison Arthurs.
We are increasingly investing in securitised bonds
UK-based Ms Arthurs travelled to Malta earlier this month to discuss Insight’s views on the low interest rate environment which has prevailed over the past four to five years with local practitioners.
Insight Investment Management, one of UK’s largest asset managers and a Bank of New York Mellon Asset Management company, owns Valletta Fund Management jointly with Bank of Valletta.
In her presentation, Ms Arthurs reviewed the impact of the low interest rate environment on the wider investment landscape, and concluded that the authorities were right to slash rates to record levels.
“Looking to the next 12 months, the core government bond markets – German, the UK, and the US – yields are likely to remain relatively low and range-bound,” Ms Arthurs told The Sunday Times. “The risks to this remain primarily an improvement in economic growth or a reduction in fear surrounding the eurozone crisis. Our view is that any sell-off is likely to be small given the continued low interest rate environment.”
Ms Arthurs added that as long as the growth environment remained weak, governments indicated that they intend to continue keeping interest rates on hold for at least the next 12 months. Inflation was not expected to be an issue.
Despite being low, corporate bond yields remain an attractive proposition. This thinking is based on corporate fundamentals being strong: leverage is low, companies have built up large cash balances and have access to the capital markets, which means the risk of default is deemed to be low.
“Corporate bonds are attractive if investors are seeking an instrument which gives a return that compensates for the risk,” she continued. “Both corporate bonds and high yield bonds which are further up the risk spectrum are attractive for similar reasons – the default environment in high yield bonds is also currently relatively low compared to historic levels.
“We believe investors are earning a premium over that which adequately compensates for the risk. High yield bonds are more volatile, and investors need to consider their own appetite for risk before investing in this type of asset.”
Ms Arthurs explained that for investors looking for attractive future returns it is not always necessary to invest in lower-rated bonds to generate the desired return. The less well-known parts of the credit universe can provide an attractive risk-reward trade-off.
She continued: “With some global blue chip companies in ‘defensive’ sectors looking expensive, we are increasingly investing in securitised bonds, like bonds with collateral backing them. These have structures requiring more credit-intensive research but which offer a more attractive yield.
“Both the fundamental and the technical picture are positive in the corporate bond market. Market commentators ask whether the risk-adjusted return is still attractive. We believe it is.”