Bonds: the best buying opportunity of the century?, April 2020

“I said that 2008/2009 was a once in a career buying opportunity. I lied. We have another one.” - Stephen Snowdon, manager of Artemis Corporate Bond

“Bonds are the bargain of the century – the last time we had this kind of opportunity was in 2009 and I think the opportunity is even better today.” - Gregoire Mivelaz, co-manager, GAM Star Credit Opportunities

“Investors should be hoarding credit like they’re hoarding toilet rolls.” – Chris Bowie, manager of TwentyFour Corporate Bond

“It’s probably the best value investment grade market I have seen in my career.” – Ben Edwards, manager of BlackRock Corporate Bond

Over the past month or so we have experienced savage falls in stock markets, which have naturally grabbed our attention. But when you hear bond fund managers talking like this, you should also sit up and take note.

Here, Darius McDermott, managing director of Chelsea Financial Services, takes a look at what is causing all the excitement:

“We’ve spoken to a huge number of fund managers over the past few weeks and what is abundantly clear is that bond fund managers believe that, for the first time in a very long time, their asset class is looking extremely good value.

“Given the threat of a severe global recession, markets have been pricing in unprecedented levels of defaults, but most managers believe the numbers have been over-done and bond assets have been oversold. They also believe the recovery in bond markets will be rewarding.”

Capital upside, with a decent yield while you wait

“Bond prices have fallen to significantly low levels. As prices have fallen, yields have increased significantly and, for the first time in many years, investors are being compensated for taking extra risk on corporate bonds.

“For active managers able to discriminate between those companies with sufficiently strong balance sheets to be able to survive the next few months, and those that face extreme hardship and possibly bankruptcy, the opportunities have opened up nicely.”

What the managers have said in more detail:

Stephen Snowdon, Artemis Corporate Bond fund: “The initial [bond] sell-off was indiscriminate and turned into the worst liquidity crunch in credit markets I’ve seen in my 25 years as an investor.

“But then the new issue market started up, largely thanks to the Federal Reserve announcing it would start buying corporate bonds. We sold some riskier bonds to buy higher quality replacements, and you’d think doing that would involve a big drop in yield - but no. The first two deals came so cheaply we could improve the quality of the fund without dropping too much in credit spread.”

Chris Bowie, TwentyFour Corporate Bond: “During the last two crises this century, credit has led equities in the recovery by several years; because coupons are contractual and dividends are discretionary, so the rewards to fixed income holders should come back quicker in the cycle.

“Don’t get me wrong - we certainly expect a raft of downgrades across swathes of fixed income and no sector will be immune. But we do not expect an Armageddon scenario either.

“The huge extent of the government support in response to COVID-19 in our view mitigates some risks, at least for sensibly run companies with what we would regard as acceptable levels of leverage. For more levered companies or those with more questionable asset quality, our outlook is materially different. We expect to see a significant increase in high yield energy, travel, and leisure defaults, for example.”
Gregoire Mivelaz, GAM Star Credit Opportunities

“Prices have fallen so much that valuations now suggest one of the strongest buy signals for a number of years – bonds could even be the bargain of the century.

“Importantly, 2020 is a corporate crisis, not a banking crisis. In fact, the role of banks is crucial for the recovery. In 2008 they were part of the problem, today they are part of the solution. They can help companies survive and even bounce back. They have unlimited liquidity and are not paying dividends for at least 9 months. I believe banks are the safest place to be today, after sovereign debt.”

Ben Edwards, BlackRock Corporate Bond “Intervention from the European Central Bank, Bank of England and Federal Reserve has put a floor on the market -but not before we saw largest drawdowns ever seen in some markets.

“We then had a week of the largest investment grade issuance of all time. $111bn last week, $230bn for the month. That’s 30% higher than past record.

“It’s probably the best value investment grade market I have seen in my career.

“The next 12 months will be about capital returns, not yield, but the outlook is looking excellent medium to long-term.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The managers' views are their own and do not constitute financial advice.

Published on 07/04/2020