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Double-digit returns for corporate bonds in 2020?

8 June 2020

Corporate bonds could deliver double-digit returns in 2020, despite the economic downturn, says Kames Capital. 

While corporate debt suffered a large scale sell-off earlier this year as markets reacted to the Covid-19 pandemic, corporate bonds have staged a comeback in recent weeks, driven by central bank rate cuts.

According to Alex Pelteshki, fixed income manager, Kames Capital, central bank actions combined with their desire to maintain stability in the credit markets could see the current bond rally sustained to the end of the year and beyond. 

Pelteshki said: “We have no doubt that this will be the year of corporate credit – a once-in-a-generation opportunity – and we expect further gains well into the end of the year and possibly longer. 

“The initial snap back in bond prices was fuelled by oversold valuations as well as remarkable policy response that we felt eclipsed that of the 2009 global financial crisis. Since then, central banks have aggressively targeted stability in the credit markets in order to maintain liquidity to the corporate sector. But this time they are also throwing a lifeline to weak borrowers with little to no access to credit markets.

“That is a real change of tack for central bankers and, we believe, could be enough to propel a brand-new credit cycle that will bring along medium-to-long-term positive tailwinds for the asset class as a whole.”

Kames Capital says there is a mix of opportunities across the UK, EU and US that could result in double-digit returns by the end of the year, particularly among what is classed as ‘riskier’ debt. 

Pelteshki has also called for greater economic integration of the EU, which he believes would be “transformational” for risk premiums.

Pelteshki adds: “What we like about the current developments is the resolve with which the crisis has been tackled globally by policymakers and central bankers alike.

“The cherry on the cake would be if we see this crisis act as a catalyst for a deeper restructuring of the European Union, leading to a more financially cohesive bloc. That would be transformational for risk premiums.”

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