Investing in high yield corporate bond funds
When a bond reaches its maturity date, the investor should receive the full principal amount they invested provided the company has the financial means to do so. A high-yield bond is seen as less likely to make on-time payments than its investment-grade counterparts, so it offers higher interest.
If the company defaults on its debt and goes into bankruptcy, bondholders are paid only after secured creditors are paid, such as a bank that holds a mortgage. However, bondholders must be paid in full before shareholders recoup any funds. Note High-yield bonds tend to produce higher returns than investment-grade bonds but lower returns than stocks over long periods. High Yield Corporate Bond Index delivered total annualized returns of 6.
Investors seek high-yield bonds for the possibility of higher returns, especially in times when interest rates are low. But there are several types of risks to be aware of. Investors could lose their entire principal should this occur. Interest-Rate Risk Because interest rates are more likely to change over time, interest-rate risk is greater for bonds with longer maturities. Economic Risk In economic downturns, investors often sell riskier assets and seek a safe haven in low-risk investments, like Treasurys.
An asset that trades frequently has higher liquidity than one that trades infrequently. High-yield bonds typically have higher liquidity risk than investment-grade bonds. Because the risk is so low, Treasury securities offer extremely low returns.
As of June , the yield on a year Treasury note was 1. What explains this performance? Simply this: higher yields eventually lead to higher returns. Over the next several years, it will shrink its massive balance sheet—swelled by its post—financial crisis asset purchases—by more than a trillion dollars. This, along with its rate hikes, will tighten conditions further.
The European Central Bank may begin tapering its own monthly bond purchases this year and could end them in But this is uncharted territory, and investors are understandably concerned about what it will mean for markets and economic growth. Those who stay invested tend to recoup their losses quickly. In fact, it might be an opportunity to acquire assets at attractive prices. During the taper tantrum, prices on BB-rated bonds fell, and credit spreads—the extra yield offered over comparable government debt—widened.
Last year, Brexit presented a similar opportunity in high-yield financials Display. With year US Treasury yields hovering around 2. Worried About Volatility? Consider Shorter-Duration Bonds High yield is also inherently less volatile than other risk assets, including equities.
As a result, drawdowns tend to be shallower. Focusing on short-duration high-yield bonds can limit volatility even further, since these bonds mature sooner than the average high-yield security. This increases portfolio cash flow and lets investors redeploy the proceeds in higher-yielding bonds more quickly.
For standardized performance, please see the Performance section above.
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| Investing in high yield corporate bond funds | For more information regarding a fund's investment strategy, please see the fund's prospectus. Business Involvement metrics are designed only to identify companies where MSCI has conducted research and identified as having involvement in the covered activity. Other than information which is identified as sourced from Fidante in relation to the Fund, Fidante is not responsible for the information in this material, including any statements of opinion. You'll want to have a higher risk tolerance for investing in non-investment grade bonds. Bentham seeks to add value through active allocations between individual securities and industries, while maintaining a highly diversified portfolio. |
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