It says financial bonds are looking attractive, especially on a yield or risk-adjusted basis, where volatility has been the most extreme “ever experienced”.
The wealth management firm says some bonds in the financials sector are yielding over 9 to 10 per cent. It says while a year ago the spread was 75bps over Libor, in many cases it is now over 300bps.
PSigma says recapitalisations and dividend cuts are good for bank bonds, with cuts leaving more cash for meeting coupon payments and paying off the principal of the loan at redemption.
It says long term capital raisings by banks might be negative for banks’ equity holders in the long term, but by strengthening the financial position of a company, it helps the bank to pay off existing debt and acts as a “real positive” for banks’ bond holders.
Central banks are also helping bank bonds through pumping additional liquidity to shore up the financial system. PSigma says: “By standing behind these companies and offering them support to keep the banks solvent and by implication defend their clients’ assets, the authorities have effectively decreed the banks ‘sacrosanct’, a reassuring eventuality for bond holders.”
PSigma Investment Management investment strategy director Thomas Becket says: “Corporate bonds have been sold off heavily over the last nine months, as the outlook for specific companies and the general macro backdrop have deteriorated, and investors have fled riskier assets for safe havens such as gold and sovereign bond markets.
“High yield bonds are rightly perceived to be a higher risk investment, as the yields available should reflect. However, by this time last year, the yields on offer from investments in this space were implying an extraordinarily benign economic backdrop, generally yielding on average about 75bps above Treasuries and gilts.”