High Yield Bonds – What returns did they deliver during a low interest rate environment and what do they offer investors now?
With interest rates increasing around the world, forward yields are the highest they have been in years.
At this juncture, the FIIG Debt Capital Markets (DCM) team has completed its 10th year of origination. With over $3bn raised across 86 transactions, we take the opportunity to review the performance of deals fully redeemed over the last 12 months as well as updating the hypothetical return for all FIIG arranged deals, assuming an investor had invested an equal amount in each new issue and held through to redemption.
Continuing a positive trend, we are delighted to confirm our latest IRR calculation of this aggregate of all FIIG arranged High Yield Bonds (HYBs) over the last 10 years has been 6.76%.
Eight FIIG arranged HYBs were fully redeemed over the last 12 months returning $294 million of capital to investors. Investors who held these bonds benefited from the return of their capital at a time when higher returns are available on a range of investments, including new HYBs.
HYBs typically provide regular, predictable cash flow which has been especially helpful to investors funding retirement or other living expenses during the recent period of ultra-low interest rates.
A reminder; two key advantages of bonds over equity include:
- Bonds have a defined investment period; and
- Bonds should provide more predictable cash returns.
A diversified investment portfolio usually includes an allocation to bonds. One guide to managing your portfolio’s risk is to hold your age (as a percentage) in fixed income (bonds and deposits). For example, a 60-year-old could hold 60% of their investments in fixed income and cash.
As an extension of this ‘rule of thumb’, investors should consider what role ‘high yield investment’ plays in their strategy (including when reinvesting redemption proceeds). So, a very honest question to ask oneself is “what incremental return am I getting in HYBs relative to say Australian Government bonds which arguably is my least risky available alternative?”.
As illustrated in the table below FIIG arranged HYBs have been an excellent source of cash return over and above Government bonds. Here we have used the average 10 year Australian Government bond yield for term of the relevant HYB as a proxy for the “risk free return” over that same period.
Depending on when the bond was issued and repaid, the yield on the Government bond will differ. The higher return paid on HYBs as a result of the higher credit risk inherent in the bonds provided investors a significant buffer against lower returns on Government bonds. Higher and predictable payments stabilised investor income during the last two years of uncertainty.
On redemption, many of the above HYBs paid an additional fee or redemption premium, further increasing investor returns. These fees and premiums are often overlooked when investors are weighing up the benefits of HYBs.
Taking a long-term view, it becomes clear the inclusion of HYBs has a positive impact on portfolio returns, even during a difficult economic period (which in this instance captures the Covid-19 downturn period during 2020-2021).
Fixed rate HYBs pay a predictable recurring coupon for the term of the investment which contrasts with returns on other investments which can be variable in nature such as dividends. In a well-diversified portfolio, HYB’s can enhance cash flow on a risk adjusted basis.
Contact your FIIG Relationship Manager today to talk about enhancing your income stream using HYBs.