Tabula urges bond investors to review their holdings post market volatility

European Central Bank

Specialist fixed income ETF provider Tabula Investment Management is calling on investors to review their bond holdings, saying that recent market volatility has highlighted the importance of investment grade bonds as a source of income.

In terms of liquidity, Tabula says investors in European fixed income funds should review their holdings to see what exposure they have to bonds that are likely to benefit from the European Central Bank’s recently announced EUR750 billion bond buying program. Tabula says some popular indices used by fixed income ETFs have only around 50 per cent exposure to these bonds, while 80 per cent of the bonds in the index for its Tabula iTraxx IG Bond UCITS ETF (TTRX) are eligible for the programme.

The ECB’s EUR750 billion Pandemic Emergency Purchase Programme (PEPP) announced in late March followed a EUR120 billion expansion to ECB QE, meaning the Central Bank will buy more than EUR1.1 trillion bonds between April and year-end.

“Faced with continued uncertainty, the argument to ‘buy what the bank is buying’ has never been stronger. As the ECB’s bond buying is likely to focus on the largest and most liquid issues, fixed income investors should review their funds to see how well placed they are to benefit from this intervention,” says Tabula CIO Jason Smith.

Tabula writes that over the past few years, investors have used high-dividend stocks to construct higher yielding portfolios, forgetting that companies can and do cut their dividends when revenues and incomes fall. Conversely, coupons on bonds are a legal liability and cannot be reduced in the face of adversity, unless a company goes into default.

“When building an investment grade portfolio there are several key elements: the underlying bonds must be liquid; the exposure should be equally distributed across names and sectors; and finally, the maturity of the portfolio should target a relevant maturity and not vary over time due to new bond issuance trends,” Tabula warns.

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