Artemis: The one thing everyone's getting wrong about corporate bonds

Investment view from Stephen Snowden, Head of Fixed Income 

Related funds | Artemis Corporate Bond Fund

A pressing debate for investors and asset allocators is whether corporate bond spreads are too tight. If yields are almost as high for a theoretically much safer government bond, shouldn’t they just buy gilts instead? Or even park their money in cash, given the high rates some savings accounts are paying out at present. 

This line of argument involves a fundamental misunderstanding of the corporate bond market today and the investment opportunity therein. Credit spreads may appear tight, but the optics are misleading. We think they have plenty of room to tighten further. 

Our rationale is this: corporate bonds are a lot less risky than they used to be. Companies have been cleaning up their balance sheets and are much less indebted than they were a decade ago. 

Government balance sheets have gone in the opposite direction. After borrowing heavily to support their economies through the Global Financial Crisis, governments have recently been ramping up their spending on defence and infrastructure. 

What’s more, the corporate bond market’s duration has come down, so investors are taking on less risk by lending to companies over shorter time periods. These days, companies tend to issue five or 10-year bonds, whereas a couple of decades ago, 20 to 30-year bonds were quite common. The corporate bond market’s average maturity was 8.5 years back in 2020, whereas it is about 5.5 years currently. 

Duration has never been as short as it is today, so it stands to reason that spreads should be much tighter than in the past, because investors do not need compensating for the risks involved with lending over longer time periods. We could even go so far as to say spreads should currently be at their tightest-ever levels – which they are not. 

Sterling corporate bonds now yield 5.4%¹, which is well above inflation and therefore the asset class now has the ability to preserve capital in real terms. Not only that, but there is some potential for capital gains if we are right and spreads tighten further. This makes corporate bonds a much better alternative to sitting on cash, I would argue, because the rates available on savings accounts are likely to fall as and when the Bank of England cuts interest rates. 

Ipso facto, investors and asset allocators concerned about tight spreads are fixating on the wrong thing, in our view. Given how much credit risk has come down in recent years and how high starting yields are presently, it would be a shame if the optical illusion of tight spreads hid from view the attractive risk-adjusted returns on offer. 

We have also become less negative on long-dated gilts because they, too, are offering attractive real returns, so can protect capital against the ravages of inflation over long periods of time. 

Yields have spiked due to concerns about the state of the UK’s public finances, but I think we could be at ‘peak concern’ by now. We believe the gilt market has room to improve next year as sentiment calms and inflation starts to fall. 

Notes and references

¹S&P Dow Jones Indices, the iBoxx £ Corporates index had a yield of 5.4% as at 31 October 2025  

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