Corporate bonds will be less sensitive to interest rate changes compared to sovereign bonds if the economy remains in good health, according to Jonathan Harris, investment director at Schroders.
The correlation between government bonds and corporate bonds becomes negative as investors look further down the credit rating scale into high yield, he said in a note.
Nevertheless, there are indeed some corporate issuers – such as life insurers who have to pay defined commitments from government bond income – that may benefit from higher interest rates, Harris said.
It is therefore important to understand how interest rates affect individual corporate issuers rather than just relying on one single risk metric.
Meanwhile, strong fundamentals continue to be supportive of companies, as a strong economy allows well-managed companies to generate more than enough cash to cover the interest payments on the bonds, and to even reduce debt, Harris said.
However, it is crucial to monitor companies closely, because it may be tempting to increase debt to reward shareholders, or to try and improve struggling businesses.
Conducting in-depth research and applying conviction where investors see good fundamental value as it will make a material difference to investment performance, while simply relying on the market or sectors to deliver returns may overlook a lot of performance potential at the company level, Harris said.
‘We expect earnings to remain supported by the global growth backdrop, which also provides a solid foundation for default rates to remain low or fall even lower,' he said
‘In the UK, although some areas such as construction see default rates rising as Brexit has undermined confidence, together with the relatively weak economic growth, we still see a lot of value in other sectors of that market,’ he added.