'Hard-earned' returns for corporate bonds ahead

'Hard-earned' returns for corporate bonds ahead

Contagion from outside Australia could make 2016 a bumpy, albeit rewarding, ride for Australian dollar corporate bond holders, said Spectrum Asset Management.

In an outlook for 2016, Spectrum Asset Management's Damien Wood said the new year will be a battle between fear and greed for Australian dollar corporate bond performance.

"Greed will be driven by investors increasingly frustrated by falling deposit yields. Fear looks most likely to come from abroad, namely, prevailing low commodity prices causing rising defaults in the US and problems from emerging markets," Mr Wood said.

The good news for investors is that Australian dollar credit spreads already capture some of the external fear – and the chance of widespread Australian dollar bond defaults appears to be low.

"Investors in well-managed credit funds are set to get healthy returns for the default risk taken. The earnings, though, may be hard earned," Mr Wood said.

"Contagion from outside Australia could make for a bumpy, albeit ultimately rewarding, ride this calendar year," he said.

Three-year A-rated bonds in Australian dollars currently yield around 3.5 per cent, Mr Wood said – not "great", but certainly better than current deposit rates.

The "war" between major banks to increase their deposit bases (in order to appease regulators and rating agencies) has ended, he added – suggesting that the premium corporate bonds enjoy over bank deposits is likely to increase in the coming year.

"Right now, investors are getting value, well-rewarded for the A$ credit risk taken in our view," Mr Wood said.

"The year 2016 may produce relatively high volatility but if one’s credit calls are right, attractive returns look set to follow for well-managed credit funds," he said.

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