The corporate bond market has been boosted in recent months by the perception of debt instruments issued by companies with strong credit ratings as a safe haven asset at a time when returns from cash and short-term investments such as money market funds have fallen.
Despite ongoing macroeconomic uncertainties, default rates have remained low – encouraging some investors to divert funds from government bonds facing pressure from concerns over inflation and fiscal deficits.
According to Christof Nelischer, Group Treasurer S4 Capital Group, while demand for corporate bonds fluctuates based on factors such as concerns over inflation, the most significant factor over the last 12 months or so has been the volatility of the US administration.
“Exposure to market shocks driven by political events has increased,” he explains. “Political comments have seen the market close down until it has clarity and there is every chance of that happening again.”
However, Nelischer says underlying demand for corporate bonds is largely stable. “The more challenging macro environment puts pressure on the credit ratings of companies and certain industries,” he observes. “But I would like to think that is part of the natural cycle of ups and downs.”
S4 Capital Group’s Group Treasurer refers to corporate bonds as the backbone of long-term external financing and says that is unlikely to change. “As an issuer, you don’t need to consider ancillary reciprocal business with the lender as you do with banking debt,” he adds.
Technology companies have been especially active in the corporate debt market this year as they seek to raise funds for investment in AI and related infrastructure. Bloomberg reported this week that Amazon was planning a US$12bn bond sale, which would follow the likes of Meta (which made the biggest offering of the year in October), Google’s parent company Alphabet, and Oracle who have all gone to the market in recent months.
Fabien Collado, Portfolio Manager of the Responsible Horizons Euro Corporate Bond strategy at BNY Investments says the European corporate bond market provides investors with opportunities to express views on specific sectors and improve diversification.
“Importantly, the strategy’s potential opportunity set is not limited to Europe,” he says. “Many global corporates issue in euros, meaning investors are not constrained by one economic region. In addition, the strategy also retains the ability to invest in corporate bonds denominated in other currencies, such as sterling or the US dollar.”
Collado says there are strong reasons to maintain or even increase exposure to euro corporate bonds despite tariffs introducing friction into supply chains and raising input costs for many European companies.
“The market has largely priced in these risks and what we are seeing now is that companies with strong balance sheets and pricing power are navigating this environment well,” he explains.
There is more work to be done to make corporate bonds attractive to investors though, according to the results of a survey of international financial institutions conducted by financial infrastructure provider SIX.
Corporate fixed income was identified as the asset class that was most underdeveloped from a real-time data availability perspective.
