Both today’s issuers and investors remain upbeat
If there's evidence of exuberance in global markets, this may be it. Today big corporations are finding it significantly advantageous to issue more corporate bonds and lock-in lower funding cost now, way ahead of any widespread expectation of an interest rate hike in the near future. Companies that have issued, or still planning to raise more funds in the global and local bond markets are mostly familiar blue-chip names.
Bonds of firms with high and subinvestment grade credit ratings are in a sweet spot right now. Economic and company earnings growth are running at the fastest pace in years while overall inflation remains subdued.
Put together, it's a backdrop against which both stocks and fixed income can do well. Corporate bonds, which offer a higher rate of return than sovereign debt, can do well also.
In and of itself, investing in corporate or even sovereign bonds isn't a problem. It becomes one when, for instance, a strong-willed CEO, probably consumed by personal greed, would go for the home run by encouraging his company to take on excessive risks beyond its ability to handle them, push it to the brink, and in the process limited its board's role to that of a rubber stamp collegial body.
As bond buyers, you must figure out how much you intend to risk, how much you're willing to lose. Your guideline should always be quality over junk. It means looking at companies with sound balance sheets, sound management, ethical business practices.
In bond trading, as interest rates rise, bond prices fall; as interest rates fall, bond prices rise. Bond traders and investors try to minimize such risk by creating a "laddered" portfolio of bonds with different maturities. In a "laddered" portfolio, the principal is returned at defined intervals. When one bond matures, one gets the opportunity to reinvest the proceeds at the longer-term end of the ladder to keep it going. If rates are rising, the maturing principal can again be invested at higher rates; if rates are falling, your portfolio is still earning higher interest on your longer-term holdings. Bond traders and investors also create a so called "barbell" strategy; they buy only short-term and long-term bonds, not intermediates. The long-term holdings should deliver higher coupon rates. With some principal maturing in the near term, there's that opportunity to invest the money elsewhere if the bond market goes south.
Let's emphasize this vital point again. When you build up an investment portfolio of bonds, be sure to diversity your holdings, even if your corporate group is perceived by investors as "too big to fail," so that if one sector collapses, your entire portfolio won't go down the tube. When investing, particularly in sovereign bonds, don't fly by the seat of your pants; don't be complacent. Analyze the macroeconomic picture; constantly shifting government policies and the ebb and flow of economic cycles tend to bring about new risks or new opportunities.
It's worth noting, for instance, that a steeper curve, when long-term yields rise relative to shorter-dated yields, typically augurs brisker economic growth and inflation. But a flatter one, when the gap between short and long term yields narrows, it will signal muted outlook for both growth and inflation.
In short, always keep your eye on the economic ball by staying abreast of changes in interest rates, latest economic news on the global economy and a nation's political leadership.
Doing so, you'll avoid catching a falling knife.
***** Atty. Billy Cortez is a former president of the Financial Executive s Institute of the Philippines (FINEX) and former co-chairman of the Capital Market Development Concil. He was also formerly the secretarygeneral of International Association of Financial Executives Institutes, of which FINEX is an active member. abelardo.cortez7@gmail.com