![]() Of course, each of the four contractionary periods was different. They reveal that it has historically made more sense to own investment grade corporate bonds over government bonds in all but the most severe economic contractions. Given the uncertainty in the market about whether we will experience a hard or soft landing, the previous episodes are instructive. Past performance does not predict future returns. Periods in bold in brackets reflect the period shown, which comprises the six months before the contraction, the contraction period itself plus the six months after the contraction, all periods are inclusive. Source: Source: Janus Henderson, Bloomberg, ICE BofA Euro Corporate Index, total returns and excess returns in euro. lowers strong positive excess return and reduces negative excess return.įigure 2: Total and excess returns of Euro investment grade corporate bonds during economic contractions plus six months either side (annualised figures) This turns total return positive in all the longer periods and tends to soften the extremes of excess return, i.e. some corporates will be affected earlier or later by economic weakness, in Figure 2 we expanded the period around the contractions to cover the preceding six months and the following six months. To correct for the fact that recessions do not just start and finish at the same time for all companies, i.e. Annualised figures convert the cumulative return for a period into an an annual rate. All economic contraction periods are inclusive (Iraq War = Q1 2003, Global Financial Crisis = Q2 2008 to Q1 2009, Eurozone debt crisis = Q4 2011 to Q1 2013, COVID = Q1 2020 to Q4 2020). Source: Janus Henderson, Bloomberg, ICE BofA Euro Corporate Index, total returns and excess returns in euro. 1įigure 1: Total and excess returns of Euro investment grade corporate bonds during economic contractions (annualised figures) Incidentally, investment grade bonds also outperformed equities (as represented by the MSCI Europe ex UK Total Return Index) in three out of the four periods (the exception being the 2011-13 debt crisis). It essentially displays the excess return on an index that comes from the additional yield that corporate bonds accrue over government bonds of the same maturity and the effect of any change in credit spreads over the period.įigure 1 shows that in three out of the four periods, holding investment grade corporate bonds was more rewarding than holding government bonds. The excess return isolates the portion of performance that is attributed solely to credit and is equal to the corporate bond(s) total return minus the total return on a risk-matched basket of government bonds. Returns data is available for both total return (combined income and capital movements) and excess returns. The ICE BofA Euro Corporate Index is a basket of Euro investment grade corporate bonds.
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