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Global investment-grade corporate bonds – essential asset class

Yields in the Swiss bond market have now been in negative territory for more than five years. 

October 27, 2020

corporate bonds

The interest rate environment is similarly challenging in neighboring European countries. The consequences are clearly visible in the Credit Suisse Pension Fund Index (Q2 2020).

The bond weighting in the investment portfolios of Swiss pension funds has been falling since 2014, and the trend of preceding years remains unchanged. By contrast, the weighting of riskier assets such as equities, real estate and now also alternative investments has risen. This is a familiar and much discussed phenomenon. What is new is that the world’s largest economic area, the US, now also has a zero interest rate policy. This means a huge number of private and institutional investors who require positive yields face a widely recognized challenge – pressure to invest. The obvious question is how long this situation can persist, and how soon the Federal Reserve (Fed) will be able to normalize monetary policy. Experience suggests: not quickly.

Another sign that interest rates could be hovering around zero all over the world for a long time to come is the huge amount of government debt, which has grown still further in the wake of the coronavirus pandemic. The ratio of government debt to GDP in the US was 107% in August 2020, according to the Federal Reserve Bank of St. Louis. One way to reduce this sovereign debt in the absence of any meaningful growth, austerity, or default is by appropriation from savers through negative real returns, known as “financial repression.” To achieve this, central banks keep interest rates artificially low, below the rate of inflation, for an extended period. This phenomenon was observed between 1945 and 1970. We recommend reading Reinhart, C. M. & Sbrancia M. B. (2015): The Liquidation of Government Debt, IMF Working Paper. It is remarkable how stable BBB credit spreads were in the US during this period from 1945 to 1970, and how few issuer defaults there were.

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USD BBB corporate spread over a long term

Source: Moody’s, S&P, Morgan Stanley, The Yield Book, NBER. Data as of 31.07.2020.

Historical performance indications and financial market scenarios are not reliable indicators of future performance.

This is one reason why we think global investment-grade corporate bonds remain an essential asset class and are still attractive. The direct corporate bond purchasing programs implemented by the major central banks provide further support, particularly in terms of smoothing out any short-term market dislocations.

Corporate bonds offer an attractive long-term spread.

In the current low interest rate environment, collecting this credit risk premium has become even more important. But doing so is not risk-free. There are two risks with global investment-grade corporate bonds that we regard as key. Firstly, a top-down assessment is required to manage short-term market turbulence. Investors should be able to cope with temporary losses due to fluctuations in the market, as we saw in 2008/2009 and also this year. However, these setbacks always represent attractive entry points to bonds of high-quality issuers. Secondly, borrowers facing the loss of their investment-grade rating tend to see disproportionate spread volatility, generally around three months before the actual downgrade. It is, therefore, crucial to analyze “fallen angels” early on and position portfolios accordingly. Credit Suisse Asset Management is a specialist in this approach when it comes to global investment-grade corporate bonds. Over the long term, credit risk is rewarded with a premium, as the following chart shows.

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Source: Bank of America. Data as at 31.07.2020.
Historical performance indications and financial market scenarios are not reliable indicators of future performance.

The Credit Suisse (CH) Global Corporate Bond Fund from Credit Suisse Asset Management is a long-standing and successful global fund for investment-grade corporate bonds. The fund pursues a diversified, global approach that invests in all corporate bond markets in the industrialized nations. It is actively managed and uses an innovative investment process.

Using this framework, over the past seven years the Credit Suisse (CH) Global Corporate Bond Fund has steadily outperformed both its benchmark and the peer group, and regularly been awarded a four-star rating by Morningstar.

The duration class in the Credit Suisse (CH) Global Corporate Bond Fund launched in 2014 is another innovative instrument in the fund, allowing investors to manage their duration exposure individually – at no additional cost and without creating any extra regulatory workload. This instrument has become established among a large number of institutional investors over the past six years. Whereas traditional corporate short-duration products (ETFs or funds) invest in short-dated corporate bonds, the duration class invests in the global universe and uses interest-rate swaps to reduce the duration exposure on a targeted basis. This lowers interest-rate risk, while at the same time the duration class continues to benefit from the full risk premium on the corporate bonds. Clients achieve the desired target duration by weighting the duration class and the standard class of the fund accordingly. This weighting can subsequently be adjusted to changing investment requirements at any time and at no cost thanks to the daily net asset value (NAV).

Risks:

  • The fund offers no capital protection.
  • Bonds are subject to issuer default risk.
  • The fund’s investments are exposed to market fluctuations.
  • The fund may invest in emerging markets, which are associated with greater risks than comparable investments in industrialized countries.
  • The product’s investment objectives, risks, charges and expenses, as well as more complete information about the product, are provided in the prospectus (or relevant offering document), which should be read carefully before investing.

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Global Corporate Bond Fund: This fund is domiciled and registered in Switzerland. The fund management company is Credit Suisse Funds AG, Zurich. The custodian bank is Credit Suisse (Switzerland) Ltd, Zurich. The prospectus, the simplified prospectus and/or the Key Investor Information Document (KIID) and the annual and half-yearly reports may be obtained free of charge from the fund management company or from any branch of Credit Suisse (Switzerland) Ltd. in Switzerland.

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