Six Key Factors of Investment Grade Bonds According to Capital Group – MilanoFinanza News


Capital Group experts highlight the benefits of the diversity of the global world of IG corporate bonds. Stock picking from the bottom up becomes essential to take advantage of various opportunities.

There are six factors that drive investment grade corporate bond yields. Capital Group analysts emphasize this and remind that this variety of factors allows, on the one hand, to diversify the investment strategy and, on the other hand, to have greater sources of return.

The first factor: exposure to rates

The global corporate bond market has approximately 70% exposure to North America and approximately 25% to Europe. “In the case of high-quality bonds, using market weights to assess risk and exposure can be misleading,” explains Flavio Carpenzano, Chief Investment Officer of Capital Group Fixed Income, because “the weightings individually are not sufficient for proper evaluation and construction. bond portfolio”. For this reason, it is recommended to also focus on credit or interest rate risk. Regarding credit risk, indicators such as Duration spread and Duration Times spread can be used to certify the risk exposure of a certain portfolio.

“Over the past decade, the overall interest rate, or duration, in the global corporate bond market has been steadily increasing,” the analyst explains, adding that this component can contribute positively or negatively to the returns of the entire corporate sector, depending on the general trend in government bond yields globally. “For example, in the presence of a mild recession and subsequent decline in interest rates, investment-grade bonds could offer a degree of resilience due to their longer duration than high-yield corporate bonds,” explains Carpenzano.

The second factor: exposure to geographic areas

The investment grade corporate bond universe certainly has a global reach with securities from issuers in 65 countries. Americans dominate, with Cuba accounting for roughly half the market.

The third factor: currency exposure

Experts explain that “although market risk is global in nature and issuers are based in different parts of the world, currency fluctuations are generally not part of portfolio returns”. Currency fluctuations, although minimal, may occur as short-term forward interest rates change throughout the month and may be affected by collateral conversions.

The fourth factor: credit score

Generally, each bond issue is assigned a credit rating by at least one of three rating agencies, including S&P, Moody’s and Fitch. “So we can group together all the bonds with the same rating to paint a picture of the overall credit risk profile of the market,” Carpenzano suggests, pointing out that over the past decade the overall credit quality of the index has declined while the BBB component of the index (which makes up 50 % of the market) and the level of corporate debt.

The fifth factor: sectors

Three broad categories are considered: industrial products, financial services and public services. One of the most important changes in the last decade has been the reduction in the weight of the banking sector. Banks actually shrank their balance sheets after deleveraging after the global financial crisis. Meanwhile, the technology sector is developing.

Sixth factor: issuers and emissions

The global corporate bond market indexes consist of more than 2,800 corporate issuers and approximately 15,000 different bond issues. “It is clear that there is a very wide range of investment managers with a global presence and well-resourced to identify undervalued stocks,” he concludes. (All rights reserved)


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