[Investing] Why choose global investment grade corporate bonds instead of cash or short-term investment?

As major central banks continue to raise interest rates in 2022 and the first half of 2023, deposit interest rates in many mature markets have become more attractive. Hawkish moves by major mature market central banks also pushed bond yields higher.

While short-term investments such as term deposits and short-term funds do have their benefits in a portfolio, global investment grade corporate bonds may be preferable for the following reasons:

Long-term growth potential: Yields are currently at ten-year highs, and policy rates in mature markets have reached or are close to peaking, opening up good entry opportunities for investing in global investment-grade corporate bonds. If the global economy remains solid, global investment-grade corporate bonds may generate higher income than U.S. dollar time deposits. Even if policy rates fall, investors may still benefit from price appreciation in addition to coupons, as yields fall as policy rates fall, potentially offsetting broader credit spreads.

No lock-up period: Global investment grade corporate bonds allow daily trading and there is no lock-up period, and there are no penalties like time deposits if you need to withdraw your funds before a preset time.

Reduced reinvestment risk: Investing in term deposits involves reinvestment risk if interest rates fall. For example, the interest rate on a 1-year USD time deposit is 4%. If interest rates fall by 1% in the next 12 months, investors will only be able to renew their maturing time deposits at an interest rate of 3%. By comparison, global investment grade corporate bonds currently have a maturity of 6 years1, assuming no change in credit, with a yield of 5%, will bring investors a return of 11%.

Diversification: During bear markets, global investment-grade corporate bonds tend to have negative or low correlations with equities. Since 2000, when stocks have sold off more than 20%, the Bloomberg Global Aggregate Corporate Index (hedged in USD) .

The correlation with the MSCI World Index is -0.5 to 0.1. The only exception is 2022, when the correlation is 0.5. Therefore, global investment-grade corporate bonds can be a useful diversification tool in a portfolio, especially during a recession.

Based on data from 2000 onward, bonds generally outperform cash once policy rates peak because the asset class is more sensitive to interest rates. While seemingly attractive, the higher yields earned on cash and short-term bonds come with the opportunity cost of missed returns as monetary policy eases and/or during recessions, as yields tend to decline when central banks ease monetary policy. will drop.

Invest in global investment grade companies through funds

Purchasing global investment-grade corporate bonds through funds allows investors to diversify their portfolios and hold securities from a range of issuers and durations simultaneously. Funds reduce the specific risks associated with individual issuers/bonds and help preserve capital, generate returns and ensure liquidity more efficiently than holding individual securities. Nonetheless, investors should be aware of the risk of losing capital when investing in funds and the costs incurred by investing in these funds.