Ten good reasons to invest in corporate debt

The current environment offers a good access point for corporate bonds: why is it time to invest in corporate debt or add positions in this segment? Answer for 10 reasons.

1. Lower longer
   We do not envisage a new ideology or a permanent rise in interest rates. Each exchange rate has peaked at a lower level than the previous one, and in our opinion this development is well confirmed. Factors such as high debt ratios, aging demographics and disruptive technologies, which lead to a slowdown in inflation, continue to lower yields.
2. Inflation returns to normal
   Cost inflation measured in 2021 and 2022 should gradually return to normal. In general, cost inflation squeezes the profit margins of companies and households, which ultimately reduces demand and economic growth.
3. Moderate global growth
   Lower demand, more stocks and tighter financial conditions are imminent and Chinese growth is not as strong as before. Central banks are well aware that too tight a monetary stance will weaken the current economic cycle and the credit cycle.
4. Decreasing wage pressure
   A higher rate should reduce wage pressures and thus inflationary pressures. The pandemic imbalance between demand and labor supply is expected to disappear and put an end to the temporary phenomenon of rapid wage growth.
5. Continuation of the formulation policy
   Even with the rise in interest rates in sight, full employment is still far from what it was before the crisis, and central banks should continue to take steps to strengthen the labor market as a whole. Inequality has increased with Covid and central banks will seek to find the balance needed for a more equitable economy.
6. Load widening
   Lending spreads have increased due to market instability (land policy, tightening central bank facilities, increased fears, etc.) and appear to be relatively attractive, especially in light of the current strong lending base. Moody’s expects the overall reduction in the default rate to be 1.5% in the second quarter of 2022. We expect the spread to shrink from the current level.
7. Increase in transportation revenue
   Since the beginning of the year, risk-free interest rates have risen by around 50 basis points for both US and German government bonds, giving investors better trading income. We expect yields to return to normal in some government bonds.
8. Weak bond supply
   European companies have a large liquidity position and will not have to issue large debts in 2022. In addition, bank loans are now cheaper financing options for cashiers and lending volumes are expected to increase in 2022. If we add, we will buy up to 5 euros. billion per month according to the CSPP (Corporate Sector Purchase Program), we can expect an average low net supply this year. So this is another strong technical support for corporate bonds.
9. Bonds exchanged at maturity
   In the corporate bond portfolio, central banks have a significant amount of upcoming maturities that they are preparing to reinvest. The ECB will have about 1.5 billion euros a month of corporate debt maturing in 2022; this amount will increase to 2.3 billion euros per month in 2023 and will increase further in the coming years. This represents important technical support for the European corporate bond market.
10. Good introduction
    Loan assets have been revalued and yields raised, which gives a good income. Optionally adjusted load (OAS) in our universe has increased by 26% to 170bps since the beginning of the year, AT1 bonds are now trading on OAS averaging 385bps with coupons well over 4% for a portfolio with an average BBB rating.