Bond Watch: why it could be time to buy investment grade bonds

Sam Benstead breaks down the latest news affecting bond investors.

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.

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Here’s what you need to know this week.

The defence you need in a portfolio?

Investment grade bonds, which are the safest class of corporate credit, offer an enticing mix of high yields and defensive properties, according to experts.

Michalis Ditsas, fixed income investment director at Federated Hermes Limited, says yields at 5% look “very attractive”, and are at the highest level for a decade.

Starting yields are a good indicator of expected returns for bond investors, and Federated Hermes calculates that five-year annualised returns are typically slightly higher than starting yields.

The fund manager also argues that prices are at the most attractive level in years, with investment grade bonds generally trading below par value.

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Ditsas adds that assuming inflation will halve over the next two years, investors could see “significant and positive capital appreciation” on their bonds too.

Pictet, the Swiss asset manager, prefers investment grade bonds to high-yield bonds given the uncertain economic outlook.

Generally, when investors are worried, they turn to the secure income provided by the most secure countries and companies.

US investment grade bonds are now yielding over 5.5%, well above the dividend yield of the S&P 500, and the prices of such bonds are at levels as low as after the 2008 financial crisis, it says.

Vanguard Global Bond Index fund is on the ii Super 60 investment ideas list. It owns nearly 14,000 investment-grade and government bonds from around the world with maturities greater than one year.

Interest rates hit 4.75% in Canada

Interest rates rose again unexpectedly in Canada, signalling to investors that the US may follow suit next week and hike rates again, even though the Federal Reserve suggested at its last meeting that it would pause.

The Bank of Canada increased interest rates from 4.5% to 4.75%. The May decision in the US took rates from 5% to 5.25% at the top end of the target range.

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Markets now put the odds of a US rate hike next week at around 30%, according to Deutsche Bank’s Jim Reid. Concerns over another rate rise in the US have pushed up yields on US debt, with the 10-year bond now paying 3.7%, up from 3.3% a month ago.

Yields on gilts have also been rising as a result of poor inflation numbers. The 10-year gilt now pays 4.2% for investors willing to hold it to maturity, up from 3.7% a month ago.