Generous credit spreads, foreign investors hunting for yield and accommodative central bank policies are the main reasons Andreas Michalitsianos, co-manager of the four crown-rated JPM Sterling Corporate Bond fund remains bullish on the outlook for corporate bonds.
Many investors have moved to an underweight position in fixed income as the asset class has performed strongly over the past decade.
With fixed income assets now trading at elevated prices, there have been fears that the bull market in bonds may be coming to an end.
Indeed, with low interest rates pushing yields ever lower, bond prices have rocketed as the below chart shows.
Performance of index over 10yrs
Source: FE Analytics
The Barclays Global Aggregates index risen by 126.41 per cent over the last decade, stoking further concerns of a pullback. However, while some investors shun fixed income assets, Michalitsianos said corporate bonds remain attractive.
“I only see positive technicals for the market at the moment, and while that can change, it has been like this for a while now,” the manager said.
Below, the manager tells FE Trustnet some of the reasons why he remains bullish on the asset class for the short-to-medium term.
Ultra-accommodative monetary policy
The first reason the manager highlighted was the extremely positive monetary policies from central banks around the world.
“I would start with the ultra-accommodative monetary policies that are still here and it goes well beyond quantitative easing (QE),” he said.
Central banks have been pushing interest rates lower for a number of years now, with savers being hit particularly hard.
The deposit rate in parts of Europe for example is at minus 40 basis points, meaning people are paying to deposit their cash into a bank account.
“That is hugely stimulative for investors wanting to own something else that isn’t that,” Michalitsianos said.
“A lot of investors are faced with the choice in many regions of negative returns from government bonds or positively yielding investment-grade and high quality corporate bonds and in many cases the choice made is to buy the corporate bond.”
The manager added that he does not expect these policies to unwind any time soon, despite an increase in hawkish rhetoric from central banks such as the European Central Bank and Bank of England.
He noted: “On the government side I feel the outlook is uncertain. You have had a lot of hawkish rhetoric come out from the Bank of England recently for example but really are they going to hike rates in the face of so much uncertainty? We feel the answer is probably not this year.
“So if you don’t get the hike in rates and government yields are not pushed higher because of that, then corporate bond total returns have a decent prospect.”
Credit spreads and the fall in government bond yields
Another positive for the corporate bond space is the credit spread – the difference in yields between government and corporate bonds. 
"You have the corporate spread which sits on top of the government yield and on the spread side it is very much a positive environment,” he noted.
Earlier this year, government bond prices dipped and yields rose as the Federal Reserve increased interest rates and a number of other central banks also gave a more hawkish tone.
Yet, Michalistianos said corporate bonds remained positive during this period thanks to the wider credit spreads seen in the corporate bond space.
“Even if you do see some move higher in government bond yields what we think is that the credit spread will absorb a good portion of it,” he said.
“You had credit spreads tightening from the end of May as interest rates were moving higher so it can absorb some of the return and offsets some of the uncertainty in the government market.”
The manager added that that he wished credit spreads were a bit wider, as it would give him more opportunities, but that he was still generating ideas in the space.
“I would love spreads to be cheaper so I could be buying lots of cheap corporate bonds but the reason they’re not wider is because the global growth backdrop is so good: you have this huge stimulus from QE and negative interest rates in Europe and Japan still,” he said.
“So that is why spreads are more on the expensive side but having said that there are still loads of opportunities.
“You can always look at the average and see something but when you look under the hood there’s really a lot of interesting bonds to pick up in the market. I don’t feel like there isn’t any value left: there is if you know where to look.”
Demand and defaults
The final benefit for managers in the corporate bond space is that the default rates appear to be coming down, while overseas demand is rising.
“Corporate health – you don’t have to look further than what has happened in Europe in the last few weeks with some of the idiosyncratic banking stories,” Michalistianos said.
Indeed many banks, particularly in Italy, have begun clearing some of their non-performing loans in an effort to clean up their balance sheets.
“This is really good stuff. You are taking some of the tail risk out of Italy. You can’t help but feel encouraged by this that the system that’s left is in a better shape,” he said.
But it isn’t just this improvement in banking that is providing a tailwind, but an increase in the inflows seen in recent months from all over the world.
“When I look at the technical side, demand from retirees for something that pays a coupon is high,” he said.
“We see flows every week into the mutual fund space and ETF space and it is beyond what is happening in the day-to-day risk market. There feels like there is a really solid underlying bid for bonds.”
He added that foreign “tourists” looking for credit opportunities – be it Asia-based investors looking at the euro and sterling or euro investors looking at sterling – are also helping to prop up the market.
“There is nothing like the corporate bond market for its size, diversification, yield and high quality nature,” the manager noted.
“What people want is diversification as you never know when the next problem is going to be. You want breadth and you want size and you don’t want all your eggs in one basket and I think that’s what the corporate market gives you.”
Michalistianos runs the £180m, four crown-rated JPM Sterling Corporate Bond fund, which has been a top quartile performer since the manager took over in August 2013.
Performance of fund vs sector since manager start
Source: FE Analytics
The fund, which he has co-managed with Usman Naeem since October 2015, has returned 30.27 per cent since Michalistianos took charge.
It currently yields 2.43 per cent and has a clean ongoing charges figure (OCF) of 0.68 per cent.