High yield bonds, an alternative to equities


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The colloquial name of “high yield”, junk bonds, is already a first rejection for the Spanish investor. But this type of high-yield bond, within fixed income, is an asset that should be taken into account in investors’ portfolios. Although risks are assumed with it, it can be seen as a profitability treasure at a time when the returns on fixed income are very low, and in some cases even negative. “Long-term these bonds have shown that they can be a very good alternative to the risk part if you do not want to enter the total risk of equities ”, began by pointing out Pedro Masoliver Macaya, Senior Iberia Sales of T. Rowe Price, one of the participants of the ABC Funds Society Forum in which the risks that are assumed with this high-yield debt.

These low credit rating bonds are issued by a company or by a state. They present a high risk of default on both principal and interest, but offer a high profitability. For Jaime Albella, Sales Director of AXA Investment Managers, another of the participants of the event presented and moderated by Alicia Miguel, editor-in-chief of Funds Society, this type of investment should be seen “as a substitute for equities and not for fixed income ». During his speech, he recalled that the role of fixed income has not changed but the market has evolved and today companies are more financed through bonds. «The government bond, which is negative, and the fixed credit income. To diversify the high yield does not work », he qualified. At a time when inflation is talked about a lot, although it hurts government bonds in junk bonds, “the opposite happens. They are highly indebted companies, if there is inflation they manage to transfer it to their final product and increase sales while the profit and indebtedness remains constant. Inflation helps deleveraging of these companies, “said the representative of the French manager.

For Pedro Masoliver, it is important to be aware of what is happening around you to make decisions when investing. He was optimistic about the economic recovery, highlighting the support of the ECB to provide support with the debt buyback programs. But the risk exists, “we are with very high levels of public debt and there is a risk of default within the asset.” In the specific case of the risk of Junk bonds, “the main risk is whether the issuer of the debt can meet it or not”. Based on the numbers, he considers that at the level of defaults “in the last quarter of 2020 is when we hit the ceiling and the weakest companies have gone bankrupt. Those with a solid balance sheet have been able to issue medium-term debt, “he stressed. T. Rowe Price expects more robust growth than the market discounts, “taking into account the levels of fiscal stimulus and increased consumption, once it is now repressed.” Regarding the duration of these bonds, Masoliver defended that the important thing is the credit risk, not the duration, which “is low compared to other equity assets. It is usually between two and three years. AXA IM was a pioneer in arranging junk bonds with short duration. “It is interesting for the saver who wants to preserve capital”, explained Jaime Albella.

The high yield bond market was born in the US, where it continues to have the greatest weight and the greatest liquidity, but it already exists worldwide. It offers potential benefits such as diversification of Europe or the greater growth potential of emerging markets. In the specific case of the North American market, Abella believes that the new Biden administration will bring positive effects for these bonds for three reasons: «Monetary policy, ultra-expansive fiscal policy and protectionism. It’s very good for high yield because we are talking about small companies. ” Although these bonds can be invested in different markets, AXA IM bets on the American market, “it is a more liquid market, a more dynamic economy and it should recover sooner.” Both AXA IM and T. Rowe Price have products in their portfolio that include these high yield bonds.

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