And, at the moment, there' a few different trends underway which, on the surface, may seem uncorrelated.
The general nervousness in financial markets related to geopolitical and economic concerns, most notably the fallout from the US-China trade war, has been a major factor weighing on the minds of many investors for some time. A slowdown in global growth, and the increased likelihood of a US recession, is overhanging business and investor sentiment.
Around this, central banks around the world have been cutting interest rates to record lows to bolster domestic economic activity, with a particular focus on reigniting business investment.
Bonds issuance on the rise
These dynamics are triggering responses in a range of areas, including in the corporate bond sector.
Recently there's been a noticeable build-up of issuance activity in Australia of non-government bonds, essentially spurred by strong demand from domestic and international investors. Non-government bonds cover the broad spectrum of debt instruments that financial institutions and other corporations issue as part of their funding arsenal.
Record low interest rates are proving very enticing for many companies seeking to lock in lower-cost borrowings, either for operational purposes or to refinance their existing debt. As part of this, some entities have been issuing long-term debt and retiring short-term debt to lock up their funding for a longer period.
(Data as at 6 November, 2019)
This is where general investor uncertainty around the global economic outlook is relevant, because investors are increasingly turning to bonds to add ballast to their portfolios to counterbalance potential financial shocks in equity markets.
A targeted fixed income approach
But, importantly, investors are choosing their bond investment options very carefully.
Instead of moving up the investment risk scale to find higher fixed income yields (to offset record low yields), investors are targeting companies sitting comfortably in the middle range of the investment grade ratings spectrum.
In the current environment, investors are capturing comparatively similar bond yields from corporate issuers with higher credit ratings than those at the lower end of the investment grade scale.
Which is why recent bond issues from both ANZ and National Australia Bank (each rated AA-) were heavily oversubscribed. The two major banks collectively raised more than $3 billion from fixed income investors hungry for high-quality bond securities.
How investment managers are responding
John Hollyer, the global head of Vanguard's Fixed Income Group, who was in Australia this month, explains that Vanguard – which manages $US1.6 trillion of fixed income assets – has steadily been investing into higher-rated bonds as a result of the above factors.
"At Vanguard, we like to think in terms of smart risk taking. That involves being really thoughtful about our outlook and the amount of risk we want to take," he says.
"Right now, if we look at credit, particularly in the developed markets, the spreads from corporate bonds, the extra income from taking higher credit risk, is at relatively low levels.
"We are respecting the lower growth forecast of our economics team and the fact that we're in a late cycle period where excesses in leverage could become more problematic if global GDP declines.
"So we're positioning at the conservative end of our credit exposure. We're more and more inclined to probably be reducing credit risk further … reducing our overweights to the riskier credit sectors such as lower-quality bonds, to the BBB level at the bottom of the investment grade, and buying more A and AA.
"That's what we've done in the past six months or so is reduce those credit risk exposures down from what they were."
Hollyer says corporate bond performance has been strong and defaults have been low, which is consistent with the long economic expansion we've seen since the global financial crisis.
"That's leading to the tight spreads, so the market isn't offering a lot of extra return for taking credit risk right now.
"We're not chasing return when we feel like the amount of return being offered by the market is no longer as attractive.
"So we're not afraid to pull risk back at times. We'd rather modulate our risk up and down. We feel like, with strong thinking behind our portfolios, that somewhat lessens our drawdowns in bad times and makes our return advantage more durable."
Why bonds stack up
Hollyer says that many investors looking at the low level of interest rates may be questioning why they should own bonds.
"We would say bonds and bond funds, and high-quality ones, especially investment grade like the global credit fund, have an important role in a portfolio to dampen volatility.
"When we look at markets, when stocks do badly high-quality bonds typically have positive returns.
"Sure, yields are relatively low. But remember that bonds as a diversifier are a very important part of an investor's portfolio."