With inflation likely to remain higher for longer than expected, interest rates are also likely to remain elevated as central banks seek to prevent any resurgence of exuberance.
For many investors, this environment is boosting the allure of fixed-income relative to global equities markets, and this is unsurprising given the current disparity between the available yields on offer.
Currently, the S&P 500’s earnings yield is approximately 4.7%, paling in comparison to some corporate fixed-income securities which are yielding between 6 – 8%pa.
Unsurprisingly, the Australian Bond Exchange has been experiencing an increase in both enquiries and demand from advisers, looking for high quality investment opportunities for clients.
Here are some of the key reasons why corporate fixed income is garnering so much interest.
Stability and Income
One of the most appealing attributes of corporate fixed-income securities is their stability. Corporate bonds and other fixed income securities are issued by large corporations to obtain funding for their operations who in return, agree to pay investors regular coupon payments and return the funds at maturity.
Like with most investments there are no guarantees, but issuers of corporate fixed-income securities are both legally and financially obligated to pay their investors. This predictable income stream can be highly desirable for retirees or anyone else seeking a consistent cash flow.
Diversification
Investors looking to rebalance portfolios away from riskier growth assets like equities, are increasingly being drawn to corporate fixed-income securities.
Achieving a well-balanced and diversified portfolio is a cornerstone of sound financial planning, and fixed-income can play a central role in doing so. Not only can cash flow be enhanced via regular and stable coupon payments, but greater portfolio stability can also be achieved. This is made possible because of the low levels of correlation between equities and fixed-income.
Capital Appreciation
While investors typically invest into corporate fixed-income to boost a portfolio’s income, they can also offer the potential for capital appreciation. If interest rates decrease for example, the market value of the security may increase. This capital appreciation can enhance the overall return of your client’s investment portfolio, if the security is sold before maturity.
Large Universe of Opportunity
From secured investment-grade corporate bonds to subordinated and junk debt, the world of corporate fixed-income securities offers a vast spectrum of opportunities for investors. These diverse options allow financial planners to tailor their clients’ portfolios with precision, taking into account risk tolerance, income requirements, and long-term financial goals.
Considerations
Building a balanced and diversified portfolio of corporate fixed-income securities can help your clients receive a regular, stable income, however there are various risks and considerations.
While higher funding costs are weighing on corporate profitability and stock market valuations, too much pressure could see issuers struggle to pay their debt obligations. In the event of a default, or insolvency, the value of a corporate fixed-income security can markedly deteriorate.
This is known as a credit event and depending on the kind of fixed-income security your clients are invested in, they may receive all, some or none of their investment back.
Additionally, inflation and interest rates also pose significant risks. While the former can erode the real return offered by fixed-income investments, interest rates impact the desirability, and therefore the price of existing securities. This can lead to capital losses (or gains) if the securities are sold below (above) the price they were originally purchased for.
Speak to Us
If you’re interested in knowing more about how corporate bonds can benefit your clients’ portfolios, please reach out to an adviser at the Australian Bond Exchange today.
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.