Recently, Harry Goodacre, a strategist from the investment strategy research team, wrote that compared to government bonds, an environment of narrowing credit spreads may pose a challenge to the return performance of corporate bonds. However, narrowing credit spreads do not necessarily imply catastrophic outcomes for corporate bond investors.

When investors trade corporate bonds, there is a risk of underperforming the market because if spreads revert to normal levels, bond prices will fall. Nevertheless, for long-term investors, the default rate for investment-grade corporate bonds has historically averaged only 0.1% per year, which means that these bonds have a 99.9% chance of not defaulting each year. Although investors may not achieve high loan returns, this does not mean that the returns from holding to maturity will not exceed those of government bonds.

Currently, the overall yield is significantly higher than the levels of the past decade, providing a larger margin of safety against the risk of negative returns. Looking at a 12-month timeframe, the yield on investment-grade corporate bonds would need to rise by about 0.7%, while the yield on high-yield bonds would need to rise by about 2% for bondholders to incur losses.

Despite recent market volatility, spreads denominated in US dollars remain narrow compared to historical levels, with both investment-grade and high-yield bond spreads near their lowest points since the global financial crisis. Historically, narrowing spreads have led to weaker excess returns because lower spreads reduce the room for bond price increases. Analysis by Schroders, based on data spanning over 27 years, also shows that the narrower the spread, the lower the excess return, although the variability of the results remains. "Hit rate" analysis further confirms this trend, measuring the proportion of time that excess returns are positive. When the spreads of investment-grade bonds are in the narrowest decile, the probability of generating positive excess returns within 12 months is only 12%, while the success rate for high-yield bonds is as high as 41%.

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However, narrowing spreads are not necessarily a bad situation; it depends on the time horizon and perspective of the investment. Even in the high-yield bond market, where default rates may rise significantly, the long-term average default rate is about 4%, and the average recovery rate for defaulted bonds is 40%.

As inflation回落至目标水平 and central banks continue to cut interest rates, corporate bonds remain attractive to long-term investors seeking to lock in higher yields. The current higher yields provide a greater margin of safety, as the yields on investment-grade bonds would need to rise by about 0.7% and high-yield bonds by about 2% for bondholders to suffer losses, alleviating concerns for investors worried about future price declines.