Corporate bonds and other fixed income securities have long been favoured by investors seeking a balance of portfolio stability and investment returns.
Since the Global Financial Crisis (GFC) however, ultra-low interest rates had largely removed the attractiveness of the asset class – but today, we find ourselves in a very different environment, characterised by higher inflation, and higher interest rates.
While inflation is subsiding in most jurisdictions, it is coming off a 40 year high in the U.S. and a 20 year high in Australia. It is expected that a return to target inflation will be slow and gradual, and central bankers have been clear that monetary policy will likely remain restrictive for some time.
In such an environment where the outlook for growth is subdued but interest rates are higher, corporate fixed-income is an undeniably attractive asset class – here’s why.
Stability and Predictability
One of the primary attractions of corporate fixed income is the stability it provides to an investment portfolio. Corporate bonds and other securities typically have a fixed interest rate, providing investors with a predictable stream of income.
This stability can be particularly appealing in times of market volatility, offering a reliable source of returns even when equities may be experiencing fluctuations.
Regular Income Stream
Corporate bonds and other fixed-income securities are known for their regular interest payments. This consistent income stream is especially attractive for retirees or those looking to augment their existing income.
The fixed nature of these payments allows investors to plan and budget effectively, providing a degree of financial security.
Preservation of Capital
While corporate fixed-income isn’t risk free, investors will most likely receive their investment back at par value, when the security matures.
Of course, it’s important to recognise that corporate issuers can default on payments during periods of financial stress, and in such a scenario, this could result in loss of capital.
How the Australian Bond Exchange can Help
From an enhanced income stream which is paid regular, to greater portfolio stability and diversification, corporate fixed-income has a unique role to play within investment portfolios.
Additionally, with interest rates the highest they have been in over a decade, the returns currently on offer are undoubtedly attractive.
If you are interested in learning more about how corporate fixed-income securities work and how they can be generally used within investment portfolios to complement other asset classes, contact an adviser at the Australian Bond Exchange today.
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Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.