Monday, 16th March 2020 By Scorable
Bond management: how to manage risk in the face of extreme volatility
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Volatility in bond markets was exceptionally high in the past week. The corporate debt bubble has well and truly started to burst. According to the OECD, the global outstanding stock of non-financial corporate bonds at the end of 2019 reached an all-time high of USD 13.5 trillion. Worryingly, the share of lowest quality investment-grade bonds, i.e. those rated BBB, stands at 54%. If in this crisis environment, the rating agencies downgrade BBB-rated bonds to junk, many institutional investors will have to sell them, putting even more pressure on currently turbulent markets. There is now a serious risk of a liquidity crisis in the lower-rated bond segments. 

And indeed, it looks like investors are getting increasingly nervous about corporate debt. The FT reported yesterday that “close to $300bn of bonds rated triple B trade with a yield above 6 per cent, according to data from Ice Data Services released late last week. That is closer to the 6.2 per cent average yield for double B-rated companies than the 3.6 per cent average for the $3.3tn triple B-class as a whole.

Following years of record-low rates many institutional investors moved out of the sovereign bond segment and into corporate bonds, which offered more attractive yields. Despite higher risk some investment companies even choose to launch funds specialising in the high-yield segment. Whilst the major challenge for asset managers was to generate alpha in recent years, the focus has suddenly shifted to avoiding losses and defaults. 

In these volatile times anticipating issuer risk has become ever more crucial. Artificial intelligence can help bond portfolio managers to predict future changes in credit risk with much greater precision by leveraging the right type of data and automating analysis. If you want to find out how Scorable can help you navigate those turbulent bond markets, get in touch with us now.