High-Yield Bonds

The yield offered on High-Yield Bonds is above the average for the Bond Markets. The credit rating of the Issuer is below BBB− or Baa3 due to the increased credit risk.

As the name suggests a Bond classified as a High-Yield Bond offers a yield above the average for the Bond Markets. Any entity issuing Bonds, Governments, Semi-Governments or Corporates will be allocated a Credit Rating by the Credit Rating Agencies. A Bond Issuer with a Credit Rating below BBB− or Baa3 must offer a higher yield on the Bonds they issue. This is to compensate the Investor for accepting the higher Credit Risk. High-Yield Bonds can be incorporated into a Multi-Asset or Investment portfolio, due to the diversification profile and higher yields that they offer. As an investment category, the return profile of High-Yield Bonds has a low return correlation and a lower duration compared to Investment Grade Bonds.

High-Yield Bonds are less sensitive to Interest Rate risk, offering quasi-equity returns at a lower level of volatility compared to the Stock Markets. This is due to high Fixed Income coupons. Compared to other Fixed Income Securities, there is the possibility for capital appreciation, if the issuer’s Credit Rating is upgraded. Of course, the opposite could also occur. Therefore, the analysis required for investing in High-Yield Bonds is different. The analysis must be focused on events impacting High-Yield Bond prices. Foremost is the potential for Credit Upgrades or Downgrades. Further, events driven by the Economic Cycle, Earnings Reports and the position of the Balance Sheet in terms of the level of Liquidity and Leverage. Corporate developments such as changes to Management or M&A activity need to be considered.