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High-Yield Bonds

In addition to government bonds, there are also many corporate bond issues. Corporate bonds and their various forms can behave entirely differently from government bonds and other public-sector bonds.

Definition

A special segment of the bond asset class is high-yield bonds. There is no uniform definition or differentiation of the high-yield segment from other bonds. In the vast majority of cases, high-yield bonds are corporate bonds.

Often, the rating of the issuing companies is used for differentiation. All companies that do not have an “investment grade” by one of the three major rating agencies, Fitch, Standard & Poor or Moody’s, are considered high-yields. However, this does not quite do justice because many smaller companies and niche players do not have a rating at all.

Strictly speaking, the yield at maturity of the bonds should be considered for the differentiation. It seems reasonable in the current interest rate environment to classify a bond as high-yield if the interest coupon is 5 % or above. Even a bond with an interest coupon of 3 %, which is currently trading at a price of 90 two years before maturity, achieves a yield of well over 5 % and is thus high-yielding.

Over the years, the high-yield bond market has attracted many investors seeking higher returns than those offered by government bonds or “normal” investment-grade corporate bonds.

Higher credit quality in the high-yield market

Credit quality graph

The high-yield bond market offers some exciting opportunities for investors!

We list some of these decisive advantages below:
  • Lower fluctuations in value in comparison to equities
    The price fluctuations of high-yield bonds (especially short- and medium-term bonds) are generally lower than those of equities. Therefore, they are generally considered to be safer investments.
  • Steady income flow
    High-yield bonds offer the opportunity to earn a steady flow of attractive income, even during periods of low-interest rates. With high-yield bonds, interest income is usually paid out according to a fixed quarterly, semi-annual or annual schedule. This allows retirees, for example, to predict with greater certainty how much income they will have in old age.
  • Access to the benefits of diversification
    High-yield bonds offer the opportunity to invest in a wide range of economic sectors. They can help diversify an equity portfolio as well as a portfolio of government bonds or other fixed-income securities. Within the broad spectrum of high-yield bonds, there is a wide range of potential risks and returns.
  • Some legal protection for bondholders
    If a company that has issued a high-yield bond delays or defaults on payments, the bond creditor has priority over the owner and/or shareholder in the realisation of the bankruptcy estate.
  • Passive income
    If one deals with financial independence, sooner or later, the topic of “passive income” arises. Passive income is a regular income for which no or at least very little active work is required. It is difficult to live exclusively on passive income. However, it is an excellent way to gain an additional attractive source of money through high-yield bonds. Interest income from high-yield bonds is advantageous because the returns here remain constant.

An interest rate calendar can help as an orientation for passive income

The sample portfolio shows attractive investment opportunities on Corporate Bonds. Both in EUR and USD can be found in this segment. A real sample portfolio (with a list of bond issuers) can be sent at any time upon request.
Private Altersvorsorge - Rentenrechner
7 good arguments for corporate bonds
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Attractive yields in a difficult low-interest-rate environment

in recent years, interest rates have fallen steadily in response to central bank policies. For investors and also for asset managers, it is a challenge to find a certain return in the fixed-interest area. It is not uncommon to come across bonds with a negative yield. For example, German 10-year government bonds had a yield of -0.287% in 2021, which means that the value of the investment is diminishing year by year, both in nominal terms and in real terms when inflation is considered.

Genève Invest's contribution to a diversification of high-yield bonds in a private investor's portfolio

“Our job: taking advantage of opportunities and finding market niches”

The needs of private investors have not changed: They still need cash flow predictability, at least from one component of their portfolio, and understandably so. We believe it is still possible to find attractive returns if you are willing to dig deeper; of course, this requires more effort, time, and resources than it used to. Often these are niche markets that are not easily accessible to retail investors, and in some cases, they are too niche for big players like high profile funds.

Our job is to take advantage of the market opportunities that still exist. We analyse both the primary and secondary markets in-depth and find it particularly useful to speak to the people in charge on a regular basis better to understand the history and plans of each company. This is also beneficial in assessing the actual risk, as security is paramount, or all guarantees are worthless.

It is all about the details! Healthy scepticism about ratings

We strive to balance the risk by analysing each company in-depth and constantly monitoring it. We pay attention to seniority, redemption ratios, different maturities in the portfolio, the impact of market fluctuations and the protection that higher interest rates inherently offer. We also pay attention to maturity to protect our clients’ portfolios against inflation and potential interest rate increases.

Without question, selecting the right corporate bonds for your portfolio requires in-depth analysis and many years of experience. Genève Invest has proven expertise in the field of fixed-income corporate bonds.

Here, seven specific security criteria which are crucial for the sustainable success and thus the corresponding satisfaction of our clients.

Our 7 Safety Criteria
1 • Professional analysis
2 • Continous monitoring
3 • Broad diversification
4 • High seniority
5 • High interest coupons
6 • Additional income by exploiting the yield curve effect
7 • Low-Cost based on value investing principles

We do not consider credit ratings to be a reliable indicator. While we do take them into account, we rely on our own thorough analysis using a model that we have developed and improved internally and that has proven itself in various market cycles.

As a result, we have still managed to generate significantly positive returns for our investors in recent years, as our audited performance results attest. In this respect, the high-yield bond asset class has always played a major role and fulfilled its function well.

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