Amid market turmoil, every investor is looking for ways to protect his or her portfolio. According to research from AllianceBernstein, investment-grade corporate bonds have promising yields and spreads to provide this protection. Unlike stock investments which are temperamental and leave investors subject to the rise and fall of the market, investment-grade corporate bonds provide consistency and substantially less risk.
For assistance incorporating investment-grade corporate bonds into your portfolio, consider working with a financial advisor for guidance.
Investment-Grade Corporate Bonds Basics
Investment-grade corporate bonds are highly-rated bonds that can be bought from a private or public company. Bonds are issued by a corporation as a fixed-income security used to raise capital to fund various projects.
The sale of corporate bonds theoretically provides a win-win situation for both the issuing company and the purchasing investor. Corporations have access to lower-cost funding than they’d traditionally achieve through a loan and investors receive a low-risk investment with a predictable payout over the life of the bond.
What Makes Corporate Bonds a Low-Risk Investment?
The low-risk aspect of bond investment lies in the knowledge that the only way to lose out on your original investment is if the company fails completely. Even if a corporation declares bankruptcy, it is still on the hook for paying out its bondholders.
During a recession, companies that are unable to manage their books correctly tend to collapse at a higher rate making bonds a less attractive investment. Experts currently don’t think this will be the case in this recession, though. Many companies issuing bonds today have been through downturns before and come out alive.
“Today’s issuers are in better shape financially than issuers entering past recessions,” the AllianceBernstein report reads. “The corporate market went through a default cycle just two years ago when the pandemic hit. The surviving companies were the strong ones.”
Breaking Down The Data
There are two main factors as to why investment-grade corporate bonds will provide the conservative investment that investors are seeking without sacrificing low-risk or high reward.
Historically high investment-grade corporate bond yields
Recessions have a reputation for creating a state of panic among investors, but they also have created a chance for opportunity in the corporate bond market. To strengthen the economy, the U.S. Federal Reserve has been boosting interest rates to keep inflation under control.
The result: “Investment-grade corporate yields and spreads are at multiyear highs, and the yields on high-yield debt now average 9.5%,” said AllianceBernstein. This has produced the prospect for investors to secure high returns on corporate bond investments that weren’t available in previous years.
Steady high-yield bond performance
With a global pandemic taking its toll on all sectors of the economy, high-yield bond returns were expected to fall as well.
The result: “The relationship between yield to worst and future five-year returns held steady even during the global financial crisis, one of the most stressful periods of economic and market turmoil on record,” according to the report. This means that investors who bought high-yield bonds during the start of an economic downwind and held them for five years saw a similar starting return. Predictions are that this will hold true through the current economic downturn.
The Bottom Line
Today, the market is seeing higher yields in corporate bonds than they’ve been in years which can pose as a great opportunity for investors looking for a stable inflation buffer. Plus companies that survived the pandemic affliction are more likely to survive the present and future recession obstacles, offering an even more attractive bond proposal.
Tips to Improve Your Investments
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