It’s not just about choosing which companies to buy and which corporate bonds they issue, but also the corporate bonds we like. “
Patrick O’Toole expects accumulated savings and consumer demand to lead to higher-than-consensus economic growth, which will benefit corporate bond issuers who can refinance and cash at the deadline.
“We see a strong economy and somewhat higher inflation as the seeds for a moderate rise in government bond yields and continued demand for the higher yields available on corporate bonds – meaning the corporate sector will again be the winner against government bonds in 2021,” he explains.
But corporate bond yield spreads warrant caution and greater volatility may occur soon.
“After all, 2021 starts with lockdown,” notes Patrick O’Toole. Their reach is expanding and investors can look to potential profit declines, or we can see spreads widening as risk appetite increases. “
Patrick O’Toole, who runs the CIBC Canadian Bond Fund and the Renaissance Corporate Bond Fund, says his team doesn’t see much value in government or short-term corporate bonds this year. He says corporate bonds with a duration of seven to 20 years should “yield fairly good returns in comparison”.
In this category of companies, his team loves banks, telecom companies, renewable energy sources, infrastructure bonds, some auto and retail companies, and real estate investment funds (” Rhett “In French or” Rhett »In English) Industrial type. He said they are less interested in other real estate investment funds and high-quality facilities, and are “very selective” when it comes to oil and gas companies.
The high spreads of around 370 basis points versus Treasuries at the start of the year lead them to be cautious in this category as well.
He said, “We believe that the high yield sector may face some disruptions if the closures lead to this risk mentality.” But if we saw these spreads moving towards the 500 basis point region, we would be more inclined to expend some of our firepower. “
When it comes to high productivity, he knows his team still loves technology and healthcare, as well as some high-end energy companies.
This article is part of the program AdvisorToGo, Created by CIBC. Written without sponsor participation.