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08-05-08
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Market Commentary: Is this the time to buy corporate bonds?
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The outbreak of the US housing crisis in August last year triggered a sharp increase in credit spreads. In other words, the difference between the yield on ten-year government
bonds and that on corporate bonds of the same maturity began to widen, with the result that the performance of corporate bonds lagged behind that of government bonds. Before the
mortgage crisis broke, credit spreads had narrowed to historic lows: the rate of interest on investment grade corporate bonds was just one and a half percentage points higher than
that on government bonds. This unusually low premium for corporate bonds was a sign of overheating in this segment. In the meantime, the premium has soared to almost record levels
of 3.5 percentage points. It is interesting to note that most of this widening is accounted for by bonds issued by banks rather companies in other industries.
Is now the right time to buy corporate bonds? Our research shows that the behavior of corporate bonds does not differ fundamentally from that of equities. When stocks perform
badly, this is also the case with corporate bonds. On the other hand, when investors in general manifest a greater appetite for risk, then the time for corporate bonds has
come.
Our main scenario assumes that equity markets will continue to trend sideways with pronounced volatility for some time before stabilizing in summer. Therefore, we feel that it is
still too early to recommend buying corporate bonds. Accordingly, until further notice a portfolio's fixed-income allocation should consist of high-quality bonds with short to
medium-term durations.
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Dr. Thomas Steinemann
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| Chief Strategist of the Vontobel Group |
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| +41 (0)58 283 78 44 |
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Contact
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