The Year of the Corporate Bond, Finally

Investors found few places to hide from last year’s demolition derby, which hit corporate bonds harder than it did stocks on a global basis. But if Wall Street’s credit managers and prognosticators are right, 2023 will be the year that corporate bonds boom.

Despite a late-year rally, the value of corporate debt declined worldwide in 2022 by $2.6 trillion, or nearly 17%, according to Bloomberg data. Blue-chip corporate debt had the worst year on record after a similar fall. By comparison, stocks fell 13.7%.

One reason bonds are poised for a rebound is that debt is looking more attractive than equity. The 2022 swoon means investors can buy bonds at big discounts to last year’s values, with the average low-risk corporate bond priced at about 90 cents on the dollar. Less than two years ago, they traded at 110 cents on the dollar.

As the economy weakens, companies with high credit ratings will use spare cash to reduce their debt rather than buy back stock, Bank of America Corp. strategists say, which is a positive for holders of those bonds. The prospect of an economic slump, which means lower corporate profits, dims the outlook for stocks. And if recession pushes riskier companies into bankruptcy, shareholders could be wiped out, while bondholders typically recover at least part of their investment.