Investments

High-Yield risky, but attracts investors with yields as high as 9%

Posted by MoneyController on 15.05.2024

When a financial product offers (at least, in the short term) moderately high returns, it is usually also characterised by moderately high risks: this is the case with high-yield bonds, which are now characterised by historically high returns and risks.

Historically high yields and risks for high-yield bonds

High-yield bonds are by definition bond products that offer higher returns than the average returns of their asset class. However, they also carry higher risks, namely the risk of seeing their price fall dramatically on the secondary market or, in the worst case, of seeing the issuer go into default. Default risks, after all, have increased in an environment of high interest rates.

Default risks are increasing

On this subject, in ‘Financialounge’, Leo Campagna reports on some considerations by Justin Jewell, Head of European High Yield Leveraged Finance at RBC BlueBay Asset Management. The manager explains that one of the problems of high-yield bonds are precisely the risks related to insolvencies: if in the two-year period 2021-2022 the rate was close to zero, in the next two years, on the other hand, Jewell explains, the percentage of insolvent companies could grow to a range between 2.5% and 4%.

Active management and the prospect of new issues

It is not surprising, then, that this risk is being repaid in the markets with historically high yields, notably between 7% and 9%. In his analysis of the bond market, Jewell believes that today is a favourable time for active management, since as risks increase, it is very important to closely analyse the soundness of issuing companies before investing. Remaining in the high-yield bond sector, another opportunity noted by the RBC BlueBay AM manager consists of issues related to so-called mergers and acquisitions (due to more favourable rates for issuers).

Read also:

What are bonds and how do they work?

What are the main management styles with regard to the benchmark?

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