The coronavirus pandemic has led to cyclical and structural instability, the effects of which will be felt in the global economy for several years yet. Despite this, at the end of 2020, the excess return on Investment Grade (IG) [1] corporate bonds over the so-called 'risk-free' sovereign yield curve was unchanged, at pre-crisis levels. This paradox comes at a time when corporate earnings and balance sheets have been fundamentally altered by the current economic crisis and many companies are facing an unprecedented situation.

Review of 2020

At the peak of the pandemic, corporate bond yield spreads soared to an average of over three times their normal level. By the end of December 2020, these spreads had returned to levels below those seen at the beginning of the year (excluding the real estate sector). The massive liquidity provided by the central banks had enabled some companies to refinance their debt over the short and medium term at historically low rates. Currently, more than 25% of euro-denominated Investment Grade corporate bonds have a negative yield.

In 2020, the performance of euro-denominated IG corporate bonds came to over 1.3% for 3- to 5-year maturities and nearly 2.5% for an average maturity of 8 years.

However, behind these positive figures, another reality can be seen: the extreme dispersion of yield spreads within the IG corporate bond universe. In assessing an issuer's interest rate, the quality and the sector concerned make all the difference.

Looking at new issues, despite sluggish revenues and rising debt, by the end of the year many large IG companies had done very well as they managed to finance their debt at very favourable (sometimes negative) rates. The paradox can be explained partly by central bank interventions (low interest rates and their purchase of corporate bonds in particular) and partly by the arrival of Covid-19 vaccines which herald the prospect of light at the end of the tunnel. Meanwhile, many investors in search of yield are resigned to taking on additional risk to obtain a less negative yield than that available on risk-free sovereign debt, where yields have continued to fall. These elements are contributing to the current price inflation across all financial assets.

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