Blog: Cutting Through the Noise

Corporate Bonds Assuming Worse than the WorstPrint

Posted on December 12, 2008

By Scott Ronalds

This posting is for the bond geeks in the crowd.

The manager of our Income Fund, Connor, Clark & Lunn Investment Management, recently did the following analysis on corporate bonds. 

If you passively buy a portfolio of 5-yr U.S. investment grade corporate bonds today and hold them to maturity, over 45% of your portfolio needs to default before you are worse off compared to a similar portfolio of government bonds. In calculating this, it is assumed that half of the defaults happen in the next year and the recoveries are 30% (i.e. the bond holders get back 30 cents on the dollar in dissolution), which is lower than the long-term recovery average of 40%.  The worst 5-year investment grade cumulative default experience over the past 30 years was under 2%.  During the depression (1931-35) the default rate was 3.9%.

It points out the extent of the negativity being factored into the outlook for the corporate market.  It also highlights why we think the reward/risk balance in the Income Fund is very favourable.