Taking stock – Invesco Corporate Bond Fund (UK)
Key takeaways
In the last few weeks, for the first time since March, we’ve been selling more than buying in the Invesco Corporate Bond Fund UK. As a result, the level of liquidity has increased to 11%. It was over 15% going into the crisis in February but it got below 6% in June.
We’re not anticipating a significant sell-off in the short-term. The market continues to be very firmly underpinned, both directly and indirectly, by the gigantic monetary and fiscal support packages of the big central banks. The ECB alone is buying about €2bn on average in the investment grade market each week. It now holds €250bn of corporate bonds on its balance sheet but has ample capacity in its purchasing programmes to continue at this rate.
We’ve been reacting to a less attractively valued market and taking some opportunities to sell some bonds at prices we think are good. The yield of the sterling investment grade market has fallen to less than 1.8%, similar to its pre-crisis level, or even a bit lower, and a long way from April’s 2.5-3% range. The spread, at about 150bps, remains above the 122bps low it reached in February, but is now at its average of the last few years, not at the attractive levels we’ve had in recent months.
On top of recognising that the market is more fully valued, we have also wanted to make some changes at the bond level. We bought bonds from a number of very high-quality issuers who were relatively early to return to the market after the March correction. We were happy to take the larger coupons that these issuers offered at the time. We’re not worried by the credit risk in any of these names. They are strong businesses. But we have to re-assess continually on the basis of current pricing and what bonds offer the fund from here.
For example, in late March the fund bought the newly issued Pfizer $2.625% 2030 just below par. This was sold in July at 111.5. At this selling price, it yielded less than 1.4%. We also added Caterpillar $3.25% 2050 at 99.6 and this was sold at 115.3, yielding 2.5%. For USD bonds at these maturities, the yield no longer looked like a good level of compensation.
The fund’s exposure to subordinated bank bonds was increased a bit in the second quarter, when we saw some very attractive opportunities. Going into the crisis, we weren’t holding any AT1 bank debt. It’s the riskiest part of the bank debt structure and this is an investment grade mandate. But we added in both primary and secondary in March, buying the UBS $7.625% at issue (for 100) while also getting the Credit Agricole $8.125% and UBS’s existing $7% for prices in the high 80s / low 90s. We sold the UBS $7.625% position for over 111 but overall exposure to AT1 and to the rest of subordinated bank debt hasn’t come down much. It’s still a relatively good area of the market for risk-adjusted yield.
Supply slowed a bit over the summer, from the very high levels of Q2, but it has picked up again recently. The headline yields are certainly not as enticing as a few months ago but there are lots of new deals to look at. Added to this, news-flow is heavy at both the macro and micro levels, so there will be plenty to do to keep on top of the securities in the fund and the opportunities in the wider market.
Investment risks
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The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
The securities that the Fund invests in may not always make interest and other payments nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity for the securities in which the Fund invests, may mean that the Fund may not be able to sell those securities at their true value. These risks increase where the Fund invests in high yield or lower credit quality bonds. The fund has the ability to make use of financial derivatives (complex instruments) which may result in the fund being leveraged and can result in large fluctuations in the value of the fund. Leverage on certain types of transactions including derivatives may impair the fund’s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the fund being exposed to a greater loss than the initial investment.
The fund may be exposed to counterparty risk should an entity with which the fund does business become insolvent resulting in financial loss. The Fund may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events. The fund’s performance may be adversely affected by variations in interest rates.
Important information
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This document is for Professional Clients only and is not for consumer use.
All data is as at 31/08/2020 and sourced from Invesco unless otherwise stated.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available using the contact details shown.
