Global economies are all at different points in the economic cycle—and that means there are sweet spots, particularly when it comes to some credit markets relative to similar sectors in other markets, including different interest rate environments. As the U.S. economy has bounced back, for example, U.S. banks have recovered, making their debt relatively more expensive to EU financial issuers and, hence, less attractive to a global investor who can switch between the two. Given this context, there are many reasons why Canadian plan sponsors should look at investment opportunities in the global investment grade credit markets beyond just issuer and market diversification.
Yielding to maturity
Consider that different global issuers issue in different maturities and with differing liquidity in different markets. They also offer more choice (as well as maturity diversification) to investors who can invest outside their own domestic market. While there are very few domestic Canadian bonds with maturities beyond 30 years, there are many more issuers in USD, GBP and EUR that have longer maturity dates and would be potentially attractive to Canadian pension funds (albeit on a currency hedged basis).
At the same time, regulatory regimes around the world have created different structures for bond issuance that also offer attractive investment opportunities. For example, the recent introduction of contingent convertibles (CoCos) and other hybrid issuance in euros has offered investors opportunities to buy higher yielding additional T1 issues. But while these structures offer yield advantages, it is imperative that the structure is comprehensively analyzed to ensure the implicit risk/rewards are fully understood.
There are also investment opportunities that arise when issuers familiar to investors in one market decide to issue in another where their name may not be as well known. For example, CEZ Group, a Czech-based electricity generating company and known issuer in euros, recently decided to issue in U.S. dollars. However, due to poor name recognition, CEZ Group was required to offer investors an increased yield spread above U.S. treasuries relative to the spread it can issue in euros. For a global investor, this marked an attractive investment opportunity.
Default and downgrade rates also differ between markets adding to investor choice. Canadian investors could use investment grade global credit either as a sleeve within their own domestic allocation and retain their Canadian benchmark, or as a strategic allocation: both will give potential for greater diversification and additional yield.
Gordon Ross is institutional portfolio manager, Pyramis Global Advisors