3 - Christ Op He Dispas, Gestion Obligataire Banque Degroof

8/14/2019 3 - Christ Op He Dispas, Gestion Obligataire Banque Degroof

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Les obligations dentreprises (corporate bonds) et

les obligations indexes sur linflation comme placements stratgiques pour les fonds de

pension


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Table of Contents

Corporate Bonds

Inflation linked Bonds


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5Source : Moody s

Inflation Linked BondsCorporate Bonds

What BBB means?

Sufficient capacity to pay interest and repay

principal in normal circumstances but

More sensitive to adverse economic conditions orchanging circumstances than higher rated categories

Some reminder - What is a corporate bond?


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6Source : Moody s


S&P Moody's

AAA AaaAA+ Aa1AA Aa2AA- Aa3A+ A1A A2A- A3

BBB+ Baa1BBB Baa2BBB- Baa3

Investment Grade



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7Source : Moody s


S&P M oody's

BB+ Ba1BB Ba2BB- Ba3

B+ B1B B2B- B3

CCC+CCC CaaCCC-CC+CC CaCC-

Speculative grade / "Junk bonds"



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8Source : Moody s

Cumulative losses (%) much higher below investment grade !




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Main characteristics

Source : Moody s


Iboxx Corporate EUR JP Morgan EMU

YTM 6.24% (7.23% next call date) 3.24%

Duration 4.16 years 6.28 years

Composition Around 50% financials 23% Germany + 22% Italy+ 20% France + 8.4% Spain


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Sources: Soci t Gn rale Credit Outlook 2009

Why Invest in Corporate Bonds ?



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Sources: Soci t Gn rale Credit Outlook 2009




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In the long Run:

Implicit default probabilities > Historical default probabilities

Worst case scenario already priced in

Important liquidity premium

Government interventions

Risk/return ratio very attractive



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3%-4%Corporate

bonds

6%-45%Equities

Expected riskpremium today

Performance2008




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Assets

Attractive

Risk/return ratio


Why a Pension Fund should Invest in Corporate Bonds ?

Liabilities

IAS 19 : Discount

rate based onCorporate yield


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Main Characteristics

An inflation linked bond is a bond which protects against unexpectedinflation increase

This inflation is measured by a Consumer Price Index (CPI)

Government Bonds (in euro, mainly France, Italy and Germany)

Key concepts to analyse Inflation Linked Bonds are:

Real YTM

Break even



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Main Characteristics

You buy 1 000 000 EUR of each

OAT : you pay 1 000 000 x clean price + accrued interests

OAT I/L : you pay 1 000 000 x clean price x index ratio + accrued interest x index ratio


France OAT I/L France OATMaturity 25/07/2015 25/10/2015

Coupon 1.60% 3%

Index ratio 1.08968 -


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Break Even

Break even = YTM of a normal Bond YTM of an inflationlinked bond with the same maturity and the same issuer =Inflation risk premium

Break even is the inflation that will make the return of theprotected inflation bond equal to the nominal one over theremaining life of the bond



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Break Even

Annualized inflation over the given period > Break even

The inflation linked bond will get a higher returnthan nominal one

Annualized inflation over the given period = Break evenBoth will get the same return

Annualized inflation over the given period < Break even

Normal bond will get better return



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Liabilities of Pension Funds linked to inflation

Hedge inflation risk

Diversification

Why Invest in Inflation Linked Bonds ?



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Relatively high real yield-to-maturity

Relatively low break even

Scenario analysis must be carried out

Market timing in Inflation Linked Bonds ?



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On an historical basis : Relatively low break even Positive signal

Current situation


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Conclusions

Corporate Bonds

Attractive risk/returnratio

IAS 19

Inflation Linked Bonds

Hedge vs Inflationrisk

Timing attractive onan historical basis

3 - Christ Op He Dispas, Gestion Obligataire Banque Degroof

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