High Yield Bonds
If you’re looking for a relatively stable way to invest money in the long-term, bonds can be a good solution. But not all bonds fall into this predictable, low-risk category, and for those willing to up the stakes, high yield bonds can be a tempting option.
In this article, we’ll take a look at why some UK investors are turning to high-yield bonds at the moment, along with some information on the pros and cons of these products, and how the experienced advisors we work with can help you decide whether to include them in your portfolio.
We will explore the following topics:
What are high yield bonds?
High yield bonds are a type of bond that offer some of the highest returns on investment available, particularly while interest rates are low. But as with all investments this potential for greater reward comes at a cost: they are also the riskiest bonds on the market, and they carry the highest likelihood that the issuer will default.
When you invest in bonds of any kind, you effectively loan your money to a company, government or other body, which is obliged to make periodic repayments to you as the lender. You can think of this arrangement as a sort of ‘IOU’: the ‘yield’ refers to the income you get back from the borrower, according to an agreed schedule and interest rate.
While more predictable, lower-risk ‘investment grade’ bonds are generally issued by more stable organisations such as utilities, governments and other financially secure bodies, high-yield bonds are bonds tied to companies considered to be of high risk of failure. Of course, if a low-rated company’s performance picks up and its rating is re-assessed, the potential rewards could be substantial.
What is meant by high yield investment-grade bonds?
Bonds are graded using a credit rating system where AAA represents the highest quality (most predictable) investments and D the lowest (most speculative). The lower a bond’s rating, the higher the risk of default, and of subsequent loss of investment.
High yield bonds by definition have been granted a lower credit rating than the ‘safer’ bonds, which are what’s known as ‘investment grade’ bonds. Investment grade covers AAA through to BBB, while high yield bonds are those in grades BB, B, CCC, CC, C and D.
What are ‘junk bonds?’
Due to their high risk status, high yield bonds are sometimes known by the rather offputting term ‘junk bonds’.
This doesn’t mean that the companies that issue the bonds are necessarily on their knees, but they are likely to be unproven or at an uncertain point in their growth cycle, such as start-ups (“rising stars”). Others may be well established companies that have taken a financial blow, resulting in a downgraded credit rating (“fallen angels”) .
As part of a well balanced portfolio and with a full understanding of their relative risk, high yield bonds can bring significant rewards. Please don’t hesitate to make an enquiry if you’d like access to an independent expert with experience in getting great results with bonds.
What happens if a bond issuer defaults?
You’ll almost certainly lose a significant part of your investment. But the good news is that as a creditor in an organisation that goes bust or otherwise defaults on its obligations, holders of bonds take priority over shareholders. So if you have bonds in a company that goes bust, you are more likely to recoup some part of your investment than you’d stand to salvage had you taken out shares.
What are high yield bond ETFs?
ETFs or exchange-traded funds are a type of ‘wrapper’ that allows investors to put their money into a range of securities such as shares and/or bonds in a single package. As the name suggests, they are traded on the stock market. An ETF can be made up partially or entirely of high-yield bonds.
Advantages or ETFs include the fact that they tend to have lower ongoing fees than similar products (e.g index funds), and they can be bought or sold at any time of day. However, they usually attract a stockbroker fee if you want to sell. They also allow you to diversify your portfolio fairly easily, allowing you to spread the risk to suit your preferences.
What are the best high yield bonds?
This will depend largely on how much risk you’re willing and able to take with your savings. If you’re comfortable with the prospect of losing your investment in return for possible significant gain in the medium to long term, you can entertain the idea of lower-rated bonds, but you should always seek advice on what could happen in the word case and what steps you can take to protect your investment.
If you want access to a higher rate of return than you can expect to find at investment grade level, but would prefer not to expose your capital to the very highest levels of risk, you might want to limit your choice of bonds to the higher tiers of the high yield bonds category – e.g. grades B and BB. But the strategy you take will ultimately be up to you.
There is no definitive ‘best high yields bond list’, we know of, but financial publications will sometimes bring out a list of ‘best buys’. To get a more complete and impartial picture, we recommend you speak to an expert with an overview of the whole market, and the experience to give you the right advice.
Speak to an expert on high yield bonds today
Investing in high yield bonds can be an exciting but challenging prospect, and these high stakes products can be a very rewarding ingredient in your portfolio. But they’re not without their risks, and we would always recommend working with an expert when considering such an investment.
The experienced advisors on our books are ideally placed to answer any question you may have on high yield bonds, and to help you find the best investment strategy for you. Please get in touch if you’d like us to match you with one of the accredited experts we work with, and we’ll be in touch soon to discuss your plans and requirements with absolutely no obligations on your part.