We expect corporate bonds to deliver positive returns in the coming quarters, primarily due to the attractive yields. With money market rates becoming less attractive as interest rate cuts loom, further supporting inflows into corporate bonds look likely.
The main risk to our view is core US inflation remaining above the Federal Reserve’s 2% target level for longer than the market expects, taking interest rate cuts off the table. While such a scenario looks unlikely, in our view, and could be actually positive for investors attracted by current yields, the combination of inflation and high interest rates could soften risk appetite, eroding some of the demand the asset class currently enjoys.
US investment-grade corporate bonds – Attractive yields
The US has been the strongest economy in the developed world in recent quarters and the one most likely to lead global growth in the year ahead. The deceleration in company earnings seen in recent quarters is increasingly likely to pivot to a reacceleration – a view supported by robust company guidance in the most recent earnings reports.
While many companies remained cautious (to their long-term benefit) in the harder times, eventually lower interest rates should now both increase the availability of funding and reduce its cost, leading to greater enthusiasm for capital expenditures as well as mergers & acquisitions (M&A).
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