Invesco Perpetual co-head of fixed income Paul Read believes that greater unwinding of leverage and a lower risk appetite amongst investors has created attractive spreads which outweigh the increased risk of corporate bond default.
He says: “The unwinding of leverage has left spreads implying an overly negative outlook. We believe that credit spreads more than compensate for the increased risk of default.”
Read also says that improved supply from strong issue markets has bolstered the corporate bond market both in US and Europe and notes that the iTraxx crossover index which is seen as a barometer of investor appetite for riskier credit has widened by 130bps since May.
Though economic conditions will remain challenging for all risk markets over the coming months Read insists on the long-term fundamentals of corporate bonds: “The risks involved in credit market investing have clearly increased over the past year. However, for those investors who are prepared to look beyond the current problems, we consider value to be compelling, both on a relative basis, against government bonds, and increasingly on an absolute basis.”