Only a couple of months ago, fixed income investors were scrambling for yield, with narrow spreads and some junk bonds yielding less than 4%, CIBC’s Patrick O’Toole says.
The coronavirus has caused “a sea change in the outlook,” with spreads widening and some high-quality, investment-grade corporates yielding above 3%, he said in an April 16 interview.
“While it’s true that government bond yields remain extremely low, we now have something to buy that offers investors a much better return on a go-forward basis,” said O’Toole, vice-president and senior portfolio manager, core and core plus, at CIBC Asset Management.
The crisis has pushed up yields on investment-grade energy bonds in Canada, he said, and there are “relatively safe” high-yield corporates yielding 8%.
“We’re recommending that investors raise their exposure to corporate bonds, and that includes both investment grade and high yield. But maintain some government bonds,” he said.
The latter have served their purpose of protecting portfolios in the crisis, and could be useful again in the event of a second wave of Covid-19 infections, he said.
As the price of oil plunged last week, Bloomberg reported that about 70% of Canadian energy companies in the Bloomberg Barclays Global High Yield Index were “distressed,” meaning the yield is 10 percentage points over the government benchmark.
Several companies have seen their credit ratings or outlooks downgraded.
O’Toole also said there’s an opportunity now to add exposure to global bonds, private equity or currency. Diversifying fixed income holdings could “add a little more stability, improve your overall yield for the longer term, and hopefully keep your volatility a little lower as well,” he said.
It’s also a good time to rebalance assets. Investors who are feeling nervous about last month’s market plunge may want to build up some cash to deploy in the event of another drop, he said.
“You likely got somewhat away from your long-run targets in this episode, but look to diversify better. See what you are missing and don’t get caught again.”
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