As they generally have a higher default risk than governments, companies have to offer more interest on their bonds. However, Pascal Kielkopf took a closer look at the fact that this risk premium can vary greatly over time – and what this means for investors’ return expectations.

The capital market analyst from HQ Trust first examined the credit spread of the Bloomberg Global Corporate Bond Index. This shows the premium that issuers of corporate bonds have to pay compared to government bonds.

– “Since 2000, the premium that issuers of corporate bonds have had to offer investors has averaged around 1.4%.”

– “However, there are big differences: when the capital markets are calm, the spread is well below one percent.”

– “In crises, on the other hand, it shoots up. Then confidence falls and issuers have to offer significantly more to place their bonds. During the financial crisis, this spread was sometimes more than 5 %.”

– “The spread is currently 1.1 %. Investors can therefore only expect a small additional return from corporate bonds compared to government bonds.”

However, credit spreads do not say much about the additional income realized. The analyst calculated how these turned out over one-year periods, taking into account the level of credit spreads. The analysis covers the period from October 2000 to February 2024.

– “Over the entire period, the average premium that investors were able to earn with corporate bonds was 0.7% p.a.”

– “As a general rule, the higher the spread, the higher the realized returns.”

– “As there can be significant deviations in both directions, especially with high spreads, a broad diversification across government and corporate bonds is advisable.”

And where does the relatively large difference between the excess returns expected in the credit spreads and the one-year returns actually realized come from?

– “The spread doesn’t just refer to one year, but to the entire remaining term of the bonds. This is currently 6 years on average.”

– “If the spread falls, this means that the prices of corporate bonds rise. Conversely, an increase in the spread leads to a fall in prices.”

– “The realized return therefore depends not only on the spread, but also on how it changes over time.”