2010 is supposed to be a tough year for bonds, but it's so far, so good when it comes to the corporate variety.
Indeed, during the recent market slump, corporate bonds have nicely outperformed other 'risk assets' like stocks. Backed by strong fundamentals, the rest of this year is also shaping up well, says UBS analyst Larry Hatheway.
"Earnings and revenues are recovering strongly, debt levels
are under control and debt service ability is good," the economist said. "Credit default
rates have peaked, and healthy fundamentals suggests further improvement to come."
If there is any concern, Mr. Hatheway said it is the fact that valuations have somewhat discounted the fundamentals, particularly in investment grade corporate bonds.
However, with the prospect of lower default rates, yields and spreads in high-yield credit remain relatively attractive, he said.
"We retain our overweight of high-yield credit and market-weight of investment grade corporate bonds. Inflation-linked and government bonds remain underweight in our model portfolio."