Assessing risk and reward in corporate bond market
Key Takeaways
• Corporate bond tend to outperform government bond throughout 2022. Besides giving higher year to date total return, corporate bond credit spread with government bond also declined
• We tried to understand the key driver of the recent market movement by assessing supply and liquidity risk, as well as market characteristics
• Supply risk : in response to Covid-19 crisis, government decided to widen its budget deficit since FY20 bringing gross and net securities issuance to jump, while corporate bond issuance was experiencing a decline reducing the market share of corporate bond
• However, compared to government bond, corporate bond is still significantly lower in terms of liquidity that may not fully reflect real market condition
• Worth noting that domestic corporate bond market was dominated by sectors like bank & financial institution, AAA- rated and SOEs which should also support the idea of lower credit risk
• Diversification to corporate bond may bring some benefits as it offer shorter average duration albeit the weight is small
• In order to optimize risk adjusted return, we recommend bond investor to consider AAA to A rated corporate bond with the maturity ≤5 years
Disclaimer On
