FIIG Investment Strategy

Investment grade bonds attracting attention

Asmita Kulkarni - RMBS expert, Director Investment Strategy Group

Asmita Kulkarni

10 minute read

Investment grade bonds attracting attention

The primary bond market is showing signs of recovery, mainly in investment grade bond issuance as non-traditional investors move to relative stability of fixed income over equities.

This document has been prepared by FIIG Investment Strategy Group. Opinions expressed may differ from those of FIIG Credit Research.


There have been a number of publications recently citing that traditional equity investors as well as high yield and distressed debt investors are now amending their mandates to include investment grade fixed income securities in their portfolios. The main reason behind this is that unlike these other asset classes investment grade bonds are less susceptible to volatility.

According to data compiled by Bank of America, non-traditional investors have accounted for as much as a quarter of new investment grade bond issuance.

Central banks supportive of fixed income securities

Central banks have announced that their new powers will allow them to directly invest in corporate bonds to support the market. This level of support is important when considering investments in bonds versus shares.

Traditional bond investors know that unlike discretionary dividends on equities, coupons on bonds are mandatory for a company as long as it is solvent. This point is a very important consideration given this week the ECB has asked banks not to pay dividends or buy back shares during the Covid-19 pandemic until at least October 2020. The ECB has made this announcement to ensure banks to keep funding households, small businesses and corporations.

While at this stage there are no such announcements made by APRA, it is not outside the realm of possibilities. At the very least, investors in local bank equities should prepare themselves for a potential significant decline in the dividends paid by these companies.

Figure 1: Key differences between bonds and equities

Figure 1: Key differences between bonds and equities

Source: FIIG Securities

Bond markets, like other asset classes, ground to a halt at the onset of the Covid-19 crisis as investors tried to make sense of the market uncertainties. However, recent developments including quantitative easing by central banks and major fiscal stimulus by governments worldwide have provided support to investor sentiment, which remains shaky.

Following a week of very low issuance volumes, the US and Australian markets have shown signs of moderate recovery (chart below) over the past week. The issuance on only the first two days of this week was higher than the second and the third week of March.

Interestingly, last week’s US investment bond issuance was more than 5-times over-subscribed, meaning there was 5-times more demand for these bonds than actual issuance.

Majority of this new issuance has been in investment grade companies, though some high yield corporates, such as YUM Brands (operators of KFC, Pizza Hut etc) have successfully issued bonds with medium term tenors.

Figure 2: US corporate bond issuance (ex govt, USD) – March 2020

Figure 2: US corporate bond issuance (ex govt, USD) – March 2020
Source: Bloomberg. Data as at 31 March 2020


Investment grade bonds provide a certain level of protection to investors as the fundamental credit quality of these companies means that they will remain viable to continue paying coupons on their bonds. Understanding company fundamentals is important in any market correction as this allows investors to identify trading opportunities.

Currently we are seeing opportunities in a number of investment grade securities issued by the major banks, as a well as key infrastructure related issuers such as Australian Gas Network, Royal Women’s Hospital, Sydney Airport and Praeco Pty Ltd (Defence HQ), all yielding in excess of 4%.

Please reach out to your Relationship Manager to understand any of these opportunities or to open a new bond trading account.

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