Corporates are now ‘surrogate safe havens’, say top bond managers

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ZURICH: Corporate credit has become a ‘surrogate safe haven’ asset in a world where investors are not being adequately rewarded for holding government debt, leading bond investors have said.

Speaking at the Fondsmesse ’13 Conference, fund managers from Lombard Odier, AllianceBernstein, Reyl AM and the head of fixed income at ETF giant iShares, said there are still ‘pockets of value’ for bond investors but they are increasingly difficult to find.

The bond managers’ comments follow a bleak appraisal of fixed income from a panel of absolute return managers at the same event.

Roundtable chair Roman van Ah of Swiss Rock Asset Management questioned the panel on whether movements towards high yield and corporate debt had become a ‘desperation trade’ given the low yield, low interest rate environment.

Stéphane Monier, deputy global CIO of Lombard Odier AM, dismissed this suggestion and said rather than ‘desperation’ investors were seeking solace in new safe havens.

He said: ‘Investors used to think government bonds were the only safe haven, if you were in Switzerland you looked at Swiss bonds and US investors went to Treasuries, but the situation has changed and these bonds, I would say, are no longer such safe havens.’

Monier said investors tend to hold sovereign debt in order to prepare for ‘worst case scenarios’. However, the Lombard Odier man said there is no sign of a ‘major meltdown in equities’ therefore it made sense for investors to look further down the credit spectrum.

‘We are reaching valuations which I would consider extreme and the valuation risk is considerable even in government bonds, so everyone is looking for a new safe haven.'

'I would say corporate credit has therefore become a ‘surrogate’ safe haven, as investors are getting compensated for this risk.’

Duration risk

Elsewhere in the panel, Jeremy Cunningham, who is part of AllianceBernstein’s European corporate credit team, echoed Monier’s point stating investors would receive a 6-8% yield in high yield bonds at a time when holding government debt had an average yield of around 2%.

Cunningham also warned against investors cutting duration.

‘There are a lot of investors saying now is the time to go to shorter duration for fear of rising interest rates. But you have to look at it practically. Rates, in our opinion, will not shoot up. They will rise, but it will be gradually,’ he said.

‘Therefore, you have to look at the cost of doing that move, what is the cost of going shorter duration, and if you do it too soon, then the costs will outweigh the benefits.’

In an investment note back in January, bond star Bill Gross of PIMCO recommended investors opt for short duration bonds in order to tackle inflation fears and the possibility of rising rates.