How to position now, as spreads are tight and central banks are winding down their purchase programs?
Nordic unrated issuers yield constantly more with a similar credit risk profile than rated companies in Europe. They give excess yields of 50–150 bps, compared to rated peers. This makes Nordics a special and interesting region to invest in.
Year 2017 exceeded all expectations in short corporate bonds. Returns were very good, taking yield levels into account. Nordic corporate bonds have been significantly stable, giving a steady return without any volatility. Sharpe ratios have hence been outstanding.
What makes the region so particular?
The Nordic corporate bond market is among the soundest ones in the world, and the countries and economies in the area are extremely stable, safe and sound. Nordic corporates have historically relied on regional funding from institutions and households, and thus they have not needed expensive international credit ratings.
They also enjoy lower volatility, thanks to very local and long-term oriented end-investors. The Nordic markets can be accessed only through active management – there are no indices nor passive index products. The region has been unknown and overlooked by many global investors.
Looking ahead, corporate profits are still healthy, economies are growing fast in most parts of Europe, and the ECB has supported the euro fixed income market heavily. Nevertheless, the tide is shifting in the monetary policy of the ECB. The purchase program will be unwound, and interest rates will rise. Avoiding interest rate risk is a key element for 2018.
How to position now?
In the corporate bond markets, many themes are still valid: a strongly recovering economy, good corporate profitability combined with healthy credit fundamentals, and favorable financing conditions despite the European Central Bank’s policy shift.
Before ending, the ECB’s purchase program could well shift towards corporate bonds. The demand for higher yielding bonds will continue as long as the path to tighter monetary policy remains gradual. Rolling out from negative levels to the pick-up in quality issuers, albeit unrated, is worthwhile.
Diversification in bond investments is the golden rule. Also, careful issuer selection is key, as some countries and sectors are ahead in the economic cycle. The Nordic countries and markets are heterogeneous in many ways and can offer diversification in bond portfolios.
Text: Tomas Hildebrandt
Tomas Hildebrandt is a senior portfolio manager for institutional clients. He is a member of Evli’s asset allocation team and is also working as a market strategist. Tomas joined Evli in 1996 and has been working in capital markets for nearly 30 years.
Interested in further reading? Download the white paper The Nordic Corporate Bond Market.