A Great Time to Buy Corporate Bonds!

Excerpts from a note by John Carswell, President & CIO, Canso Investment Counsel Inc.

John Carswell founded Canso in 1997 after over a decade in the fixed income markets with some notable institutional investment firms. Canso has become a highly-respected credit investment firm with a history of taking advantage of market dislocations and making good returns by being prepared to go against the crowd.

You know about all the bad news on COVID-19, the economy and the financial markets but there is also some good news that we thought we should tell you about. Our very conservative positioning protected your corporate bond portfolios and we have been finding amazing values in the market carnage. There are very cheap securities out there and this is an amazing time to invest in corporate bonds. If you have large positions in cash or government bonds, this is the time to use that liquidity to buy corporate bonds and loans from those who have to sell.

You are well aware from reading our newsletters over the past couple of years that we thought the credit markets were overvalued and frothy. We thought the next crisis would be a market sell off and not a problem with financial institutions like the Credit Crisis of 2008. We also worried that if markets started down for some reason leveraged credit funds would be forced to liquidate and ETFs that invested in equities, corporate bonds and loans would be under severe pressure to sell their holdings. This is now happening.

Government support programs are coming but the current stress is driving companies to draw their bank lines and issue bonds to cover the expected shortfalls in revenues while they wait. When the equity markets collapsed in March, the credit markets went “no bid”. Secondary trading has seen corporate bonds move to very wide spreads as markets are illiquid and investors are frozen in fear and indecision.

We have told you repeatedly “liquidity doesn’t matter until it’s the only thing that matters”. This is very true right now. It doesn’t really matter what you think your bond is worth if you have to sell because of a margin call or your index portfolio has withdrawals. There are many sellers and few buyers right now so whatever bids exist are setting the prices. Buyers like us are using up their scarce liquidity and want to be compensated for using up their capital and are demanding a very high yield.

We have been trading hundreds of millions of bonds over the past two weeks, with more than a billion in trading in one day last week. Liquidity will eventually improve with the government support and central bank liquidity programs but the uncertainty about the economy and company prospects mean that corporate bonds and the equity markets will struggle for some time.

As you know, we sell when others are buying and buy when they are selling. We are certainly now buying. We think the next few weeks are the time to buy corporate bonds, as they will see their cheapest levels when things appear the darkest.


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