For investment grade corporate bonds it will be the rate move that dominates total returns short-term

30th September 2016 by Chris Iggo

One of the fundamental implications of quantitative easing (QE) in the bond markets has been the impact of pricing of the highest quality bond assets. Investors pay a cost (in terms of reduced yield) to own the safest of assets. But increasingly they get pushed down the credit curve so over time ratings buckets become increasingly expensive one after the other. It’s happened to a very large degree in investment grade markets – especially in Europe where QE continues – yet in the lower rated sectors of high yield there are very clear differences in risk premiums still. If you want return, you have to be down the credit curve and hope that the waterfall effect of portfolio shifts driven by QE prolong and extend the credit quality compression. If credit generally is to keep outperforming then it’s the most credit-like assets that have to perform.