Schroders multi-asset team has downgraded its outlook for investment grade corporate bonds, citing valuations and geopolitical risk as reasons.
In its Global Market Perspective report, published last week, the team gives its economic and asset allocation views for the second quarter. Schroders assigns a ‘neutral’ position to investment grade corporate bonds.
This is down from the overweight suggested in the first quarter’s outlook and driven by the recognition that investment grade corporate bonds’ valuations are “unattractive to history”.
The report says: “Both the spread of US and European investment grade credits have recently widened mainly due to the growing concerns on Cyprus.
“However, from a valuation perspective, spread levels remain expensive when viewed over the short term. Moreover, there is a risk to investment grade from the steady rise in corporate leverage rates.”
Schroders multi-asset managers consider the gradual economic recovery and ongoing search for yield to be “supportive” for investment grade corporate bonds.
The team has maintained its underweight outlook for developed market government bonds, saying it is negative on US treasuries, UK gilts, German bunds and Japanese government bonds, and kept its overweight position towards high-yield bonds and emerging market debt.
It continues to maintain an overweight outlook on developed market equities, which have seen a continued rally over the opening months of 2013, and a neutral stance on emerging market stocks.
Equilibrium Asset Management investment manager Mike Deverell says: “If you look at some investment grade bonds, the yields are very low. We are concerned that if inflation carries on rising and people start selling off bonds then certain parts of the sector could start to see losses.”