Investments

Could an interest rate cut benefit high-yield bonds?

Posted by MoneyController on 21.02.2024

What is the possible scenario for high yield bonds given the European Central Bank's forecast for a rate cut?

Interest rates and the bond market

The interest rates set by central banks are a benchmark for the cost of money and borrowing. No wonder, then, that these same rates have a direct impact on the bond market. On a duration basis, rising rates favour newer bonds and push down the price of existing ones; when rates fall, as is expected this year, although we do not know when for sure, the opposite happens.

Rate cuts and high yield

A cut in interest rates makes newly issued bonds with lower yields less attractive and instead causes bonds issued earlier, i.e. in line with higher interest rates, to appreciate. According to an article by Antonio Cardarelli in 'Financialounge', Raiffeisen Capital Management believes that a rate cut could benefit a specific category of bonds, namely high-yield bonds.

Tight monetary policy and the credit risk of some issuers

More than the bonds themselves, the issuers could benefit from a rate cut. As the analysts at Raiffeisen Capital Management explain, this mainly concerns issuers with a higher credit risk; issuers that have had difficulties in financing themselves, but could find it easier to refinance their debt in view of an interest rate cut.

Provided there is no severe recession in Europe

According to the analysts at Raiffeisen Capital Management, the price of high-yield bonds should also be supported by a limited number of issues. One of the conditions for this scenario is that there is no prolonged recession in Europe, namely "a slump in the economy", but this hypothesis, according to the analysts, "seems unlikely" so far.

Read also:

Bond ETFs: a way to diversify bond investments

Is it better to actively manage corporate bonds?

Goldman Sachs says this is 'the year of bonds': how to take advantage?

TODAY’S MOST READ ARTICLES

MOST READ ARTICLES OF THE WEEK

MOST READ ARTICLES OF THE MONTH

MOST READ ARTICLES IN THE FINANCIAL FORUM

View classification