Investment | 16 May, 2020

Medium-term value of US investment-grade corporate bonds

Joaquín González Portfolio Manager

Interest rate environment. Financial Repression 2.0

As a consequence of the global economic slowdown deriving from the COVID-19 outbreak, the main central banks have set their rates back to 0% or negative; and they are promising to leave them at this level in the coming years to support the sustainable recovery of economic growth.

They will also print money at the fastest pace in history to offer liquidity to financial markets and fight against the strong deflationary pressures. As a result, savers who subscribe deposits could see their wealth eroding over time since they will be receiving 0% in interest rates for several years (best-case scenario), while inflation could be between 1% and 3%.

The solution to the background of a zero-per cent or negative interest rates

In March, US corporate bonds offered the third-highest yield over US treasury bonds (spreads) in history since the “Great Recession” (2008-2009) and the “Great Depression” (1929-1933), until the Fed decided to buy asset ETFs and aid the primary market of investment-grade bonds thus helping companies refinance their debt at reasonable rates.

Now, the IRR is lower albeit it is still attractive when compared to the IRR offered by US treasury bonds to investors with medium-term investment goals since it is likely that the volatility will persist at least for the next 12 months.

How to invest in investment-grade US corporate bonds?

Diversified investment to avoid excessive concentration in specific issuers that may default on their debt and, as such, generate major losses to investors.