High Yield Bonds
Invest for capital growth
What is High Yield Investing?
External ratings agencies assign credit ratings to companies and governments issuing bonds based on an assessment of their credit-worthiness. This rating can help to indicate the issuers likely ability to pay interest and principal as scheduled.
A high credit rating (above BBB or BBA for Standard & Poor’s and Moody’s, respectively) is considered ‘investment grade’ while a low credit rating is considered ‘high yield’ (sometimes called ‘sub-investment grade’ or ‘junk bonds’). High yield bonds are more volatile with higher default risk among underlying issuers versus investment grade bonds. Issuers with low credit ratings need to pay higher interest as incentive to purchase their bonds. As with most investments, higher potential risks demand higher potential rewards to compensate.
The high yield bond market was born in the US and that remains the largest and most liquid market. However, today there is a global high yield market offering potential benefits such as the diversification of Europe or the stronger growth potential of emerging markets.
Why High Yield Bonds?
High yield bonds offer a number of potential benefits, alongside some specific risks such as higher volatility and higher default rates. In the current environment of persistently low interest rates, bond investors are finding attractive yield difficult to come by. For those in a position to take on higher levels of credit risk, high yield bonds may provide a significant yield enhancement to a well-diversified portfolio.
Higher yield and diversification
In addition to significantly higher income than investment grade bonds, high yield often behaves differently to other areas of the fixed income universe so can provide important diversification to a broader fixed income portfolio.
Equity-like return with lower volatility
There is also the potential for capital growth. Historically, the high yield market has delivered a long-term return profile broadly in-line with equities1. Like equities, high yield bond prices can increase as a result of improved performance of the issuing company or a wider economic upturn. However, the typically higher income component of high yield bonds means that they are generally less volatile than equities.
High yield bonds are typically issued with shorter maturities than many investment grade bonds (generally less than 10 years) and therefore tend to have relatively lower duration. This means a high yield strategy may be less exposed to interest rate risk than most investment grade strategies.
Our High Yield Strategy
AXA IM offers a range of high yield strategies investing within and across regions, sectors and maturities.
Our experienced, dedicated high yield teams employ a consistent investment process which has been tested over a range of market cycles and conditions. This process is centred on the philosophy that the key to superior long-term potential returns in the fixed income market is compounding current income and seeking to avoid principal loss through fundamental credit analysis and macroeconomic research.
Our robust bottom-up credit research process focuses on identifying companies with improving credit trends, while the top-down component seeks to identify risks and opportunities associated with the overall economy and market. In this way we aim to minimise default risk and manage volatility through active management, while pursuing high yielding opportunities and potentially generating capital growth.
Fixed Income Quarterly Views
Fixed Income Quarterly Views
Time to think about the downside
Never be short duration for too long, be wary of risk assets when they are too expensive, always assume the England football team loses.
London Calling: the latest on bonds and the Fed (again)
It’s said in London that you can wait for 20 minutes for a red bus, then three come along at once.
Fixed income risks
Comparing fixed income versus equities still tends to show the former as a lower risk option overall. However, fixed income seek to provide opportunities across the risk/reward spectrum to position portfolios for different environments and generate varying levels of income and potential return.
Interest rate risk
Bond prices usually move in the opposite direction to interest rates, so when rates are rising, bond prices may fall, and vice-versa. This is because bonds are riskier than cash, so investors need the incentive of higher rewards to use cash to buy bonds. When interest rates are low, demand for bonds is higher which pushes up prices – and vice-versa.
There is a risk that the issuer of the bond will default on its debt by failing to pay investors what it owes them. This risk varies with the credit-worthiness of the issuer and is reflected in their credit rating. Investors who take more risk by investing in lower rated issuers have the potential to achieve higher reward, and vice-versa. Issuers with a higher credit rating are considered ‘investment grade’ while those with a lower credit rating are considered ‘high yield’.
Liquidity risk is a measure of how quickly an investor could turn an asset into cash, if they needed to. In market environments where liquidity is low there is a risk that if a bond holder wanted to sell the bond, they may have difficulty finding a buyer, especially at a good price.
Inflation – the rate at which the prices of goods and services increases – can be a risk if the level of inflation is higher than the level of income made on savings and investments. The income paid by bonds is fixed so when inflation is rising, that level of income may be less appealing and bond prices tend to fall - and vice-versa.