As the financial crisis of 2008 rolled over into the European crisis of 2011, one investment has remained popular: the U.S. government bond. Even after a ratings downgrade, U.S. Treasuries have held a firm place in the hearts of many investors.
With prices bid up, yields have been compressed so far that bond managers are looking for better opportunities.
“We’ve been neutral or long-duration, thinking that interest rates are going to stay low, if not fall,” says Patrick O’Toole, vice president of global fixed income at CIBC Asset Management. “We want to maintain overweights in corporate bonds; we think that strategy is going to pay off over the next few years.”
Over the medium to longer term, he says corporate bonds represent a better investment than sovereigns, as credit spreads have remained attractive among investment grade issues, and are improving among high-yield bonds as well.
“Since the tensions have increased in Euroland, there’s been pressure on corporate bonds. When we have geopolitical risks rising, you see investors getting nervous, you’ve seen the stock markets getting hit, and you see a phenomenon I call running home to mama.”
In this case, mama is the U.S. government bond, which despite its own travails, remains a last refuge in the minds of the risk averse. Canada has also benefited from this phenomenon, by way of our proximity to the U.S. and even more stable fiscal picture.
As a result of the flight to extreme safety, corporate and provincial bonds have become more attractive than Government of Canada issues, as they haven’t risen as quickly in capital value.
“Corporate bonds do win over the long term—we’re going to see the odd negative quarter, where they lag or have a negative return vis-à-vis government of Canada bond,” he says. “If we see the economy actually move into a recession, you’d see those government bonds benefit more so than corporate bonds.”