Bonds that protect your portfolio - Trends-Tendances sur PC

Bonds that protect your portfolio – Trends-Tendances sur PC

Equity markets fall again, the economy bends under the weight of inflation and interest rates rise. In this chaotic environment, more and more investors are once again interested in bonds. And rightly…

“Are bonds the right plan to get through the current crises? Which segments offer the best opportunities? How to invest in them? Before answering these questions, it seems necessary to recall some fundamentals of the bond market.

“Are bonds the right plan to get through the current crises? Which segments offer the best opportunities? How to invest in them? Before answering these questions, it seems necessary to recall some fundamentals of the bond market. For those who don’t know Again, a bond is a security representing a loan.As a lender, you are entitled to interest at the rate agreed upon when issued (this is called the primary market). a bond being that you can resell it at any time on what is then called the secondary market. But how is the price set? The basis is the amount lent (known as “the principal”) which corresponds to 100%. Then, the main factors are the evolution of the creditworthiness of the debtor and the interest rates.When the new securities issued offer higher yields, the price of the old ones falls to offer an equivalent yield, taking into account interest and the difference between the repaid principal and the course. The rise in rates thus explains why global bonds have just sunk in early September into a bear market. The global index of quality sovereign and corporate bonds (Bloomberg Global Aggregate Total Return Index) has indeed fallen by more than 20% since January 2021, a first since its creation in 1990. For the investor, this may seem accessory. After all, he receives the interest and will be reimbursed the agreed capital in due course. But if you invest via a fund, its value constantly evolves according to market prices. So are bonds attractive today? It depends. “Yields have come back up quite a bit, so a lot of bonds are starting to offer yields that we haven’t seen for quite some time,” said Erik Joly, chief investment officer of ABN Amro Private. banking. “In a particularly difficult stock market context, we are seeing more and more (institutional) investors turn to quality bonds, continues Yves Kazadi, senior analyst at Beobank. However, we must not rush but remain attentive uncertainties, especially in this period when the risk of recession is very real.” A position joined by Vincent Juvyns, global market strategist at JP Morgan Asset Management. “We are cautious on the high yield corporate bond segment as the economy may contract slightly.” These high-yield (or speculative) bonds are those whose financial rating is listed below BBB- or Baa3 with houses such as Standard & Poor’s, Moody’s or Fitch. They are currently posting an average yield of almost 7% for securities in euros. But Yves Kazadi points out that “in an environment of rising interest rates, more indebted and more fragile companies are much more exposed to the risk of default, especially since sectors sensitive to the economic situation such as the media or industry are well represented. in the world of high yield bonds”. The fear is an increase in the default rate, ie the proportion of bonds whose issuer does not meet a deadline (reimbursement of a bond or payment of interest). This is a sign of financial difficulties, even the prelude to filing for bankruptcy. A concern shared by specialists at Standard & Poor’s. For European speculative bonds, they predict that the 12-month default rate should jump from 1.1% in June 2022 to 3% in June 2023, or even 5% in a pessimistic scenario. In the United States, the agency envisages a rise in the high yield default rate from 1.4% to 3.5% in June 2023, and even 6% in a pessimistic scenario. Much less risky, “the sovereign bonds of the hard core of the euro zone (Germany, France, Netherlands, Belgium, etc., Editor’s note) currently offer correct yields”, judge Erik Joly. For example, the 10-year Belgian OLO shows an annual yield of 2.3%. “It is certainly insufficient to compensate for inflation, but the investor benefits from the guarantee of an excellent debtor, continues the ABN Amro expert. In the peripheral countries of the euro zone, the risk premiums have increased, especially in Italy with the approach of important elections (this September 25, editor’s note). Which is explained in particular by the stop of the repurchases by the European Central Bank (ECB). However, I think that the new government will not want to not jeopardize the relationship and the financial flows from Europe. Moreover, the ECB recently created the famous TPI (“Transmission Protection Instrument”), an instrument that allows it to buy bonds from a country specific in the event of a threat of excessive deviation of its rates from the average. Vincent Juvyns, JP Morgan’s expert, favors foreign sovereign bonds, particularly the United States. “US Treasuries are currently yielding close to 3.5%. While there is currency risk for the European investor, the dollar is trending higher and should remain strong.” Yves Kazadi, for Beobank, also favors Chinese sovereign bonds. “This is one of the few markets to post a positive performance since the beginning of the year. Chinese sovereign bonds offer a 10-year benchmark rate of 2.7% and we expect the yuan to appreciate in the over the next few years as the Chinese economy transitions towards consumption.” For higher yield, Vincent Juvyns recommends investment grade (IG) or quality corporate bonds. Specifically, these are companies with a rating from AAA (the highest) to BBB-/Baa3. Payment defaults are rare. At the global level, Standard & Poor’s has identified over the past 10 years three issuer defaults that had an “investable” rating in the previous 12 months, compared to 914 for “speculative” issuers. Quality corporate bonds offer an attractive average yield of 3.1% in Europe. In the United States, the yield on BBB-rated bonds alone even reached 5.5% on average. In addition, the Beobank specialist notes “a continuous influx of capital towards bonds with an ESG approach”, that is to say those whose capital is intended to finance projects with a positive environmental and/or social impact. Financially, sustainable bonds are broadly comparable to traditional securities. A government or company can issue both sustainable and non-sustainable bonds, as the differentiation is in the use of the funds. “ESG bonds show a slight premium and therefore a slightly lower yield than comparable traditional securities, explains Vincent Juvyns. But this premium should not disappear and could even increase in view of the strong demand from investors. is growing rapidly and it’s also a way for many investors to green their portfolios.”


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