After decades of falling interest rates, global rates have been rising sharply again for some time, with the result that various fixed-income products and fixed-income bonds are once again attracting the attention of investors. However, high-yield bonds are also an interesting alternative for investors willing to accept a certain amount of risk.

High-yield (HY) bonds are bonds with a higher rate of interest that are considered to have a lower credit rating, below investment grade, by globally recognised rating agencies. Such high-yield bonds are issued by companies of all sizes. The issuing companies usually have a lower credit rating themselves, and thus a higher risk of default – due to higher debt leverage, for example. Within their capital structure, many issuers of HY bonds issue various bonds with different maturities, but also with different ratings. These also result from different security structures or ranking in the case of liquidation proceeds. This enables investors to make a self-determined selection from a range of investment alternatives in line with their earnings targets and attitude to risk. Important, large and well-developed markets for high-yield bonds include the US in particular, as well as Europe.

Higher returns with lower interest rate risk

Investments in high-yield bonds benefit from higher returns, which comprise the prevailing market interest rate and the higher risk premium in this segment. For issuers of high-yield bonds, the current high inflation environment, higher interest expenses, supply chain problems and other macroeconomic uncertainties may increasingly lead to rating downgrades or even payment defaults. Higher risk premiums compensate for these higher risks.

Compared to other fixed-income products such as longer-dated government bonds or investment grade bonds, the interest rate risk (duration) is often lower for high-yield bonds. This is because issuers of a HY bond usually have the option to redeem the bond early, several years after the time of issue, at a fixed price.

Successful HY bond portfolio management through selection

The aim of the investment process implemented by Swiss Life Asset Managers in the high-yield bond area is to benefit from higher returns while minimising the risk of default. The key here is the desired definition of the investment area in terms of ratings, country risks, ESG criteria and tradability, together with an understanding of how to evaluate market and credit risks. It is very important to understand the information about an issuer: their business model, fiscal policy and drivers as well as the economic outlook in terms of free cash flow, debt ratio and rating. The latter relates to both the issuer of a high-yield bond and the bond.

In order to benefit, the credit spread of new issues is compared to existing or similar high-yield bonds. The return and risk-oriented selection of new issues is also decisive, while also considering the HY bond documentation such as bond covenants, maximum debt leverage and redemption options. Active participation in roadshow discussions with the management of the issuing company is another important factor.

When investing in the secondary market, the purchase of high-yield bonds already issued that are below their redemption value offers an interesting opportunity for entry. However, it is also worth comparing different high-yield bonds in terms of other factors such as currencies or maturities, or within a sector or rating segment.

If the economic outlook is especially uncertain, portfolio management should focus on high-yield bonds from issuers that meet particular requirements. To achieve comparatively attractive returns, it is important to have clear and resilient business models as well as sufficient revenue and earnings visibility, such as longer-term contracts, order books or regulatory requirements. In this situation, large-volume, liquid subordinated high-yield bonds (corporate hybrid bonds) issued by well-known large multinationals with investment grade rating can also offer added value as a conservative contribution to a high-yield bond portfolio.

More interesting articles

FINANCIAL SERVICE concept with Data analyzing in Forex, Commodities, Equities, Fixed Income and Emerging Markets. the charts and summary info show about "Business statistics and Analytics value".


Asset allocation: bonds as stabilising securities

TARA has replaced TINA. This opens up new possibilities for the composition of asset allocation.

Read more
Wasserkraft; Staumauer des Wasserkraftwerks Grimsel, Schweiz, Europa


How we can intensify the promotion of renewable energy

Switzerland has a high proportion of renewable energy in its electricity mix. For decades, hydropower has accounted for around 60 percent of domestic electricity production, and it thus performs well by international comparison. On the other hand, Switzerland is way behind in Europe when it comes to the share of renewable energies such as photovoltaics and wind power. Despite a good starting position, there is still a long way to go to achieve a 100 percent energy supply from renewable sources, as stipulated in the Federal Energy Strategy 2050.

Read more
The self-storage sector presents a compelling, long-term investment opportunity for an active strategy able to generate attractive income returns.

Real Assets

Self-Storage: Stockpiling growth in the UK

The self-storage sector presents a compelling investment opportunity, even in today’s growing macroeconomic headwinds. An active strategy can generate attractive income returns despite these evolving challenges.

Read more