High yield corporate bonds offer better returns than investment grade bonds, like gilts or treasurys, to compensate investors for taking on increased risk.
US corporations and financial institutions have issued high-yield bonds for years – and their popularity is starting to gain some traction in the UK and Europe as bank finance becomes more difficult to source.
The market is split with around 80% of global issuance in the Us, with the UK and Europe responsible for around 20%.
Many investors are also more open to investing in the bonds as part of a diverse portfolio because of the better returns they receive for their money
Some investment analysts are recommending high-yield corporate bonds for several reasons:
- The bonds are cheap compared to the likelihood of any default
- The risk to return profile makes the bonds attractive in comparison to equities
- Bonds have a low interest rate change sensitivity
The bonds are issued by companies having difficulties with traditional lines of credit, like bank loans.
“Investors are using high yield bonds in different ways. While many individual investors are attracted by their income, most institutional investors view high yield bonds as part of their growth allocation.” said Phillip Milburn, of fund manager Kames Capital.
“Since the 2008 financial crisis, regulators have developed new rules governing how banks ensure they hold sufficient liquid capital to protect them in the event of another crisis. From 2015 Basel III rules will require banks to take fewer risks and hold more liquid assets on their balance sheets. This means less lending to companies – which we are already seeing happen.
“At the same time, many companies are reluctant to be tied to a banking system which they perceive has failed them. Instead, they are satisfying their long-term financing requirements through the bond market, which can offer a more reliable source of funding.”
