Abnormally high yields coupled with anticipated interest rate cuts by the United States Federal Reserve have created an ideal environment for investors to capitalise on opportunities in the corporate bond market, according to an Australian investment firm.
“It looks like the US might be on the cusp of interest rate cuts in September, with an 85 to 90 per cent chance of a rate cut priced in from the Federal Reserve that month,” Income Asset Management capital markets executive director Darryl Bruce noted.
“Being at the top of the interest rate cycle, it is likely that money going into fixed income markets now will reward investors over the coming years as rates move lower.”
While bonds have been neglected during a period of successive interest rate hikes, this trend has driven potential yields for the asset class to generational highs.
Bruce pointed to a recent multi-billion-dollar issuance by Spanish bank Santander as an example of the surging interest in the corporate bond market.
“We are seeing strong demand for new bond issues. A few years ago, yields were much lower, but now, in the investment-grade part of the market, we’re seeing yields of 6 per cent plus. That is driving a lot of investor interest,” he noted.
“We recently saw that with a tier-two bond issue from Spanish bank giant Santander. We are also seeing plenty of issuance from the big four banks in Australia. Santander’s order book was over $4 billion, but they only ended up issuing $600 million of bonds in Australia.
“We would have liked to have seen them issue a little bit more. The coupon came out very close to 6.5 per cent, which is probably 50 basis points higher than we’re seeing on coupons for big Australian issuers, such as the banks.
“The Santander issue was only rated one notch weaker at triple B-plus. This is good compensation for investors for the risk. It is also good to see a big global bank like Santander come into the Australian market to issue bonds.”
He said with yields sitting relatively high on investment-grade debt, now is an opportune time for investors to seize opportunities in bonds.
“We’re talking to clients and one consistent message we give is to look at where yields are now. Using the Santander issue as an example, if you can lock in a coupon of 6.5 per cent for the next five years from an institution of Santander’s quality, that’s 6.5 per cent return per annum for the next five years from a defensive asset in your portfolio,” he said.
“That’s a good outcome and it is clear that money going into the bond market right now will reward investors over the coming years.”
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