Returns for senior fixed-rate bonds for Australian corporate issuers have been strong over the last twelve months compared to equities, and senior bonds are expected to outperform government debt over the next 12 months, according to specialists.
Fixed-income broker FIIG Securities has analysed the total returns for senior corporate debt compared to ASX-listed equity from the same issuer over the 12 months to 11 April 2012.
Total return includes all interest, coupons and dividends received as well as capital gain or loss.
"On average, senior bonds returned well over 10 per cent more than fully franked equity returns for the same issuer," FIIG Securities fixed income research director Andrew Gordon said.
"In most cases, equity returns were negative or below inflation resulting in a significant loss of investor purchasing power," Gordon said.
"Equity risk remains high with returns unknown. By way of contrast, senior bonds have delivered high returns with a much smaller risk profile," he said.
Gordon said one of the reasons for the outperformance of senior debt relative to equity has been the "strong appetite for corporate bonds" during periods of global economic uncertainty.
In addition, intuitional investors are short Australian-dollar corporate debt and hold significant concentrations of bank debt.
This supply and demand imbalance has driven a high level of demand for non-financial corporate bonds, he said.
Senior corporate debt was likely to outperform government debt in coming months, Antares Fixed Income investment manager Ken Hyman said.
Spread levels on senior corporate bonds would have to widen by more than 50 basis points over the next year for investors to be worse off holding senior corporate bonds rather than government bonds of the same maturity.
"If everything stays equal or steady, you're going to get a better return holding senior corporate debt given that you've got a good buffer or margin over government bond levels," Hyman said.
That contrasted to the previous 12 months where the total return on government bonds has exceeded the return on the corporates.
Much of that outperformance has been driven by falling interest rates and risk aversion.
While the total return on Westpac's Nov 2016 bond, for example, was 12 per cent, the return on a five-year government bond has been 13.6 per cent.
The three-year ANZ senior debt had underperformed government bonds also by about 10 basis points, Hyman said.
QIC head of research and strategy Peter Scobie also expected senior corporate debt to outperform government bonds.
"We aren't expecting a large decline in government bond yields and in fact, if yields rise, which is likely towards the end of the next 12 months, you'd expect corporate bonds to outperform government bonds," he said.
As Scobie did not expect any significant falls in government bond yields, he expected the running yield to be more important to the total return in the coming 12 months than in the previous 12 months where capital gain was important.
In addition, he did not see a lot of corporate supply coming onto the market so investors will be interested in reinvesting in senior corporate debt. "That will keep demand fairly high," he said.
Scobie forecasted a total return of 5.5 per cent on corporate senior bond returns over the next 12 months (down from 7.5 per cent in the past twelve months) while he expected government bonds to return around 3.6 per cent.
