Tuesday 11 August 2015 by William Arnold Opinion

High yield bonds offering better returns

For the last couple of months, credit spreads have been widening. Wider spreads generally mean higher yields for bond investors all things being equal

mountains sky sunny people

A good indicator of this is the Australian iTraxx Index which is a proxy for credit spreads in Australia.  Figure 1 shows the iTraxx Index widening from about 88 in May to around 100 currently. 

 Australian iTraxx

aus itraxx
Figure 1. The graph depicts the Australian iTraxx Index - a proxy for credit spreads in Australia.
Source: FIIG Securities, Bloomberg

Spreads have increased generally due to the higher perception of risk from such events as those in Greece, the turmoil in China and the general weakness in Australia driven by falling commodity prices.

In terms of individual credits, the move in spread is most pronounced in the high yield market.  Figure 2 illustrates how the trading margins of various AUD high yield bonds have developed over this time frame. The trading margin is the additional return above the relevant swap or reference rate. While the chart is very busy you can clearly see the trend of spreads widening and therefore yield increasing, in most cases.

High yield bond trading margins

High yield trading margins
Figure 2. The graph depicts the trading margins of FIIG originated high yield bonds over the past three months.
Source: FIIG Securities, Bloomberg

While some credits have had negative news-flows and some have reported credit positive updates, most names are now wider and offering better yields than they were just a few months ago.  Therefore, based upon returns, it is currently a more attractive time to buy credit than it has been for some time.

Get your free copy of The Benefits of Corporate Bonds eBook

Get a copy of The Benefits of Corporate Bonds eBook

Warren Hogan Webinar - Can the economic miracle continue?

Subscribe to The WIRE newsletter

Sign up to a free weekly newsletter to get the latest investment news.