EU Corporate Bonds and US High Yield Bonds to Find Yield

Paradoxically, a fall in bonds such as the one seen recently reopens opportunities for investors, given that the trend will, in any case, be of falling or at least stable interest rates. One of the isolated exceptions to the global loosening of monetary policy is Japan, but - precisely - the Land of the Rising Sun is quite distant from the economic affairs of the West.

By the way, it is not necessarily the case that a cut in official rates automatically translates into a reduction of the yield on the rate curve, as Alessandro Tentori, Cio Europa at Axa Im, explains: 'Let's take a recent example. On 18 September 2024, the Federal Reserve cuts rates by 50 basis points. One month later, the yield on the ten-year Treasury rose 50 basis points, from 3.70 per cent to 4.20 per cent. Obviously, the market had already moved well ahead of the prospects of a normalisation of monetary policy, with the 10-year coming down from the 4.70 per cent level recorded at the end of April 2024'.

In fact, one has to consider that over the past year, bond prices in general have already risen a lot - and yields have fallen a lot as a result - in anticipation of a cut in the cost of money and that, at this point, considerations on the portfolio strategies of a prudent saver must take into account a market that has been in motion for a while. The objective, therefore, should be to have securities that give an acceptable and satisfactory return without incurring excessive risks of price falls, should one have to liquidate the investment before maturity.

Cosimo Marasciulo, head of fixed income at Amundi Sgr, suggests a predominant allocation to European bonds, with a focus on investment grade issuers, i.e. those classified as more reliable by rating agencies. In particular, Marasciulo prefers securities from the European financial sector, which is characterised by a lower level of leverage than that of the US: "Investment grade securities have a better risk-return profile than High Yield (the riskier high-yield ones, ed.), with a preference for subordinated securities over senior ones (i.e. with priority redemption, ed.). At this stage, investors are thinking in terms of absolute return, which remains at historically attractive levels, compared to the spread on government bonds'.

The range between American and European rates, however, offers room for manoeuvre to the dollar area, which is strengthening for the moment thanks to the strength of the US economy. Axa economists forecast a differential of 200 basis points (2%) between Fed and ECB rates. They are concerned about the structural situation in Germany (which weighs heavily on European bond indices) and the political situation. Tentori, therefore, suggests moving to the corporate bond segment, which offers an attractive yield to maturity with respect to various parameters such as volatility, the phase of the monetary and credit cycle, and corporate balance sheets. 'In particular,' Tentori points out, 'American corporate and the High Yield universe give the investor the opportunity to capture yield without necessarily having to push too hard on duration.