The likely challenge over the next few years is likely to be to preserve, rather than seek higher returns on capital. This is particularly important given that global central banks are currently withdrawing monetary easing. We believe that active management will be crucial in this kind of market environment, particularly in the short-dated corporate credit space.
In February, a surge in inflation expectations in the context of strong global growth, combined with central banks hinting at upcoming additional rate rises caused a spike in government bond yields globally. As a result, fixed income assets have been volatile, but have held up far better than equities. Why?
One of the major themes we have been talking to investors about recently has been the changes wrought since the onset of the global financial crisis a decade ago. It is often forgotten, for example, that interest rates in the UK stood at 5.50% at the end of 2007, that 10 year UK and Greek government bond yields were nigh on identical and that the Bank of England had a balance sheet of just £77 billion. But what did the sterling corporate bond market look like?
Outside of ‘vanilla’ fixed income securities – your standard corporate and government bonds – there exists a vast array of options for investors, most of which are little discussed. These range from relatively simple floating rate notes, to exotic products with various convertible or re-set features, which can be triggered in a number of scenarios. One area that has done particularly well in 2017 has been hybrid corporate bonds.