Choose corporate over government bonds

By Vikram Barhat | November 29, 2012 | Last updated on November 29, 2012
2 min read

In the current low-interest and slow-growth environment, corporate bonds remain a more attractive option than government bonds.

And there are sound reasons why corporate bonds can be expected to continue to outperform, says Jeff Waldman, first vice president of global fixed income at CIBC Asset Management. He manages the Renaissance Short-Term Income Fund.

Read: Corporate bonds better than governments

“First, the balance sheets of Canadian corporates are in good shape,” he says. “In particular, we focus on the debt-equity ratios of non-financial Canadian companies, as well as on how they are better than those of similar corporations in the U.S., UK or Europe.”

Second, he highlights the appeal of spread of corporate bonds, which is the additional yield for owning a corporate versus a government bond.

“This additional yield helps cushion any potential negative impacts,” which can occur if overall interest rates rise, says Waldman.

Read: Economists too bearish on interest rates

Having seen corporate bonds significantly outperform government bonds this past year, he says his outlook for both investment grade and high-yield offers for 2013 remains unchanged.

It may be argued that the current spread of 1.3% is not quite as large 1.7% at the beginning of the year. But it’s still above average, he points out.

Read: Inflation isn’t a threat…for now

“[Even though] the current incremental yield doesn’t look that attractive, when you look at it from a long-term historical basis, the average corporate spread has only been 1%,” says Waldman.

When investing in corporate bonds, choosing the right securities is critical. He says this includes understanding the companies, and the terms and conditions of the individual issues.

Read: Canadian corporate debt a good bet

“We’ve been adding industries such as financial, media and telecoms, auto parts and oil and gas,” he says. “We think these industries are going to perform well in the current slow-growth environment.”


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Vikram Barhat