Current Opportunities for Bond Investors

Has there been a better time to buy bonds?

It is a very long time indeed since bonds have looked like they had any value to offer investors. With interest rates at zero and many higher quality sovereign bonds offering negative yields, it really looked like there was nothing to play for. However, thanks to the rapid rise in inflation and the inevitable rate increases which followed, we saw a sharp downward correction in bond markets during 2022. While bond prices have recovered a little in 2023, many types of bonds are still offering very real prospective returns to investors.

Bonds are rated by rating agencies according to the perceived level of risk of the issuer defaulting and not repaying the bond in full. S&P for example rates bonds from AAA (German Govt bonds for example) to AA to A to BBB, all the way to C and even below. While many bond categories are offering value currently, it is the BB category which looks particularly interesting at present, in our view. Bonds rated BB and below are known as sub-investment grade or high yield. Companies in this category are typically very sizeable companies whose balance sheets are not perceived sufficiently strong to rate them as investment grade. Despite not being investment grade, these companies have a very low default rate historically and the vast majority of them can be expected to repay their bonds even in tough economic circumstances. Even when they do default, the average recovery rate on these bonds is of the order of 60% (meaning investors get 60% of their money back).

Following the bond market selldown in 2022, many BB bonds are trading at c.80% of their par value (meaning that an investor can purchase these bonds at 80c and get repaid at 100c when the bond matures). The yields on these bonds are also very attractive following the market fall, typically 6-8% per annum. There are a number of funds specialising in these bonds and as these funds will hold well over one hundred different bonds, the risk is very well diversified for the investor. Many of these funds are currently distributing c.7% per annum back to investors. This all adds up to a very attractive mix of high yields, discounted prices and highly diversified risk and we think its time to buy.

For more information, or to arrange a meeting to discuss the suitability of investing in bonds, please contact us on 01 2375500 or email justask@harvestfinacial.ie.