- The market was right for a strong 2019 for corporate bonds
- Conditions look good for 2020, although there are some risks to be aware of
- Investors encouraged to move up to higher quality bonds to lower risk
The Positive Factors
There are some strong reasons for considering the purchase of corporate bonds this year. They are typically seen as offering a good way of diversifying an investment portfolio. With the economic picture across the globe still uncertain, this looks like a moment to add some bonds to your investments.
A stable, liquid market is another good sign for bonds in 2020. The lower interest rates seen in many countries just now is welcome news for bonds, as it has stabilised the market. Company debt bonds aren’t risk-free, but they are generally a smart choice in market conditions such as those expected for this year.
If Treasury yields continue to fall and credit spreads remain low, expect it to be a solid year for corporate bonds.
The Negative Factors
One of the main risks this year is around the US elections. This could produce volatility in the market, balancing out some of the positive points that we looked at earlier.
If the global trade wars increase, this could also harm the corporate bonds market. Another worry is that the economic slowdown seen across the planet could get worse in this coming year.
Among the rest of the biggest risks, we can see that corporate profit growth has stalled in the last few years. Meanwhile, corporate debt has been growing faster than profits. This could lead to problems with these bonds if these trends both continue in the same direction.
What to Do
A cautious, sensible approach is recommended for 2020. This means, above all, moving up to the higher level of quality in corporate fixed income. This means moving out of the high-yield corporate bonds, and into the investment-grade alternative if you want to cut down on your risk levels.
With this approach, you can stick to those corporate bond with an A rating or higher. Investors are moving away from the riskier, lower-level bonds, meaning that they are now under-performing the market.
A Few of the Bond Funds to Consider in 2020
The best option for most investors remains that of joining a bond fund. If we look for some of the best options in this market, we can see the following bond funds to assess how they fit our criteria for this year.
- Fidelity Capital & Income Fund (FAGIX). An average return over the last decade of 8.3% speaks highly of this fund. It invests in lower-quality debt securities, so it does carry a risk, giving the factors we just looked at.
- SDPR Portfolio Long Term Corporate Bond ETF (SPLB). This more closely matches our outlook, as it invests in US investment grade corporate bonds of over 10 years. It has been running since 2009 and the current yield is given as 4%.
- Western Asset Corporate Bond Fund (SIGAX). This fund looks to put at least 80% into investment grade corporate debt. Returns in the last year reached an impressive total of close to 10%.