It has been a tough year for the bond market, but high-quality corporate debt could present an opportunity for investors in the coming months.
Bond yields continue to rise as markets become increasingly concerned about inflation and a policy error from central banks. According to Patrick O’Toole, vice-president of global fixed income with CIBC Asset Management, the rise in government bond yields has derailed returns on corporate bonds.
“High-quality corporate bonds take their cues from the government bond market,” said O’Toole.
The good news for investors is that higher yields and increased credit spreads mean the high-quality corporate bond sector is now more attractive than it’s been in years. According to O’Toole, the yield on investment-grade corporate bonds in mid-June was around 5% — the highest since 2009.
While that could change if inflation remains persistent or a policy error occurs, O’Toole said it’s a good time to increase exposure to high-quality corporate bonds in a client’s portfolio.
“Bonds have gone on sale and investors should be looking to increase their exposure,” O’Toole said.
In Q4 2021, the credit spread on bonds from the big five banks compared to five-year Government of Canada bonds was down to almost 70 basis points, O’Toole said. But as of mid-June, the credit spread was more than 1.5%.
“You’re getting above 5% now on the highest-quality corporate debt in the Canadian marketplace, so it’s become fairly attractive,” he said.
However, those spreads reflect higher risk. Housing market volatility and the risk of a recession could have a negative implication for bank profitability, but O’Toole said the banks are still much healthier today than they have been in the past.
“We find these levels very, very attractive for investors in today’s marketplace,” he said.
Provincial debt is also attractive, O’Toole said. As of mid-June, long-term Province of Ontario bonds offered a full percentage yield above long-term Government of Canada bonds.
“We’re starting to become more receptive towards looking at adding provincial bonds for our clients’ portfolios, alongside potentially increasing our corporate exposure,” O’Toole said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.