Analyzing and Decomposing the Sources of Added-Value of Corporate Bonds within Institutional Investors Portfolios

Bankers, Markets & Investors, Special Issue ERD 2014, pp5-16, March 2014

This paper provides a formal analysis of the benefits of corporate bonds, distinguishing between the impact of introducing corporate bonds in performance-seeking portfolios and the impact of introducing corporate bonds in liability-hedging portfolios. We find that corporate bonds are well-suited to improve the interaction between performance and hedging motives, given that they have a well-controlled interest rate risk exposure while providing an access to an equity-like risk premium. They also allow for a more effective hedging of the liabilities when pension obligations are valued at adiscount rate equal to the market yield on AA bonds according to international accounting standards.

Keywords: Corporate bonds; Sovereign bonds; Welfare gain.