How bondholders can protect on the downside

ON BONDS

Covered bonds used in conjunction with outright exposure to bank debt could be one way bondholders find downside protection, explains T Rowe Price's David Stanley.

It may sound counterintuitive, but the best-run companies can be the ones to avoid in credit. A number of high-quality rated companies in the chemical and pharma sectors offer little upside from a bondholder standpoint, and are best avoided in favour of lower-rated companies with better upside potential. To provide some downside protection, covered bonds could be one approach used in conjunction with taking outright exposure to unsecured bank debt. These are often rated two notches higher than the sovereign and are more likely to maintain their investment grade rating in the event of a s...