A preference for bonds - but can this last?

In a period of uncertainty and high volatility across all asset classes, investors have had to diversify to ensure a steady stream of income and a balanced portfolio. Our poll this month sought to find out the preferred type of investment for investors over the last few months.

As expected, bonds saw the highest vote at 44% followed by fractional shares and ETFs, and lastly thematic baskets.

Although yields are now currently low, over the last few months investors have found comfort in the low-risk nature and steady income stream of bonds. However, analysts have suggested that bonds are no longer an effective diversifier of equity risk. The relationship between the two assets is said to have broken down, says Credit Suisse, as record low-rate volatility, evidenced by the 21-day correlation between the S&P 500 Index and 10-year Treasury yield, turned negative on 21 August 2020, after having been at nearly 0.80 in mid-July.

The US bond market is also seen to have entered a politically sensitive period and analysts anticipate more erratic moves ahead of the November elections. With the US economy falling short of a full recovery, Julius Baer says that momentum is lacking to push credit spreads to lower levels. With no new impulses coming from the Federal Reserve, the US high-yield bond market appears to be in a period of consolidation, following the rapid gains from the March lows. The Bloomberg Barclays US high-yield corporate bond return index has hovered in a tight range of 2199.8 to 2210.69 points for the last three weeks.

Similarly, grim sentiments can also be seen for the Sukuk market. After four years of rapid growth, Sukuk issuances is expected to fall 5% this year to about $170 billion due to the coronavirus crisis. According to Moody’s, the decline will be partly limited by the financing needs of GCC countries because of lower oil prices and the pandemic. However, the research and ratings agency expects to see a rally in the second half of the year to around $90 billion, led by Gulf sovereigns, as governments raise money to finance their responses to the coronavirus crisis.

Despite the decline, 2020 will still see the second highest sukuk issuance total ever, following a 36% increase in 2019. Total issuance in the first six months of 2020 dropped to $77 billion, down 12% from the same period last year, as activity in Malaysia and Indonesia flagged. While issuance in Southeast Asia saw a 25% drop, Middle East volumes rose by 7%. Moody’s also expects some African sovereigns and corporates to enter the market, following the lead of Egypt and Nigeria earlier this year.

Something to be excited about this year is the demand for social bonds. With issuances more than quadrupling this year, S&P expects social bonds to emerge as the fastest-growing segment of the sustainable debt market in 2020. The recent growth in social bond issuances indicates that the pandemic has not turned issuers' or investors' attention away from sustainable finance; on the contrary, interest seems to be growing.

Social bonds finance projects with primarily social objectives (e.g. improving food security, access to education and health care) have emerged as an unlikely tool in the economic fight against the virus to address the demands of consumers and communities that are increasingly aware of current social issues.

S&P further expects corporations and financial institutions to become more active in the social bond market as the pandemic accelerates private issuers' interest in social considerations.

Nevertheless, the hunt for yield continues. While credit spreads have tightened, global investment firms such as UBS are seeing value in US investment grade bonds, USD-denominated emerging market sovereign bonds, European crossover bonds, green bonds, and Asia high yield bonds. Against a backdrop of ultra-low yields, there is still value in select credit as a means of income generation