What makes high yield bonds so appealing?
High yield bond market in Europe is trading at 8%+ level. Companies issue new debt at 8-13%, level which we last saw more than a decade ago.
A great timing to build up a high yield bond portfolio as inflation and interest rates have peaked. Thus, the risk of losing capital due to rate hikes has decreased.
Potential rate cuts, once they come, provide investors with extra return. In the falling interest rate environment investors make extra return from falling rates, in case credit spreads do not widen and companies’ risk level stays the same.
Large coupons protect investors in the falling market. Should economies go into recession and markets dive down, large coupons that companies pay on their debt today smoothen investor returns. Historically fixed income markets have recovered faster than equity markets from market turmoil.
Avaron has strong experience in investing into high yield bonds. Avaron Flexible Strategies Fund has invested into high yield bonds 15+ years. Our team’s experience in navigating equity market cycles and investing in equities is 25+ years.
Investing in Avaron High Yield Bond Portfolio provides you with a diversified portfolio of high yield bonds in one go. The portfolio is diversified between different sectors and countries. Compared to private investors Avaron has access to new bond issues targeted to professional investors. We see much higher rates in primary issues compared to after market trading, thus investing into high yield requires proper access to information on new issues.
We are today in a unique position where high yield bonds provide better returns compared to dividend stocks and real estate. The below example compares high yield bond index returns to rental yield in Tallinn city centre, dividend yield of European equities and yield on European low risk papers.