Investing in Bonds 2023

Investing in Bonds: Developed vs Developing economies

Most high yield bonds in developed economies had losses of double digits, with some being as high as 30% during 2022. With most of these coming at the impact of the high inflation and interest rates experienced during the same period. High yield bonds also had yield spreads below historical averages, meaning there was not much difference between yields of two bond and between each payment date.

However, yields from developing markets were more positive, with local currency bonds providing high nominal yield returns (Net will be lower due to exchange rate plus liable tax). These bonds from developing markets have also been producing yields above the long run market averages from 1996-2022. The yield potential in the emerging markets is also an attractive opportunity, but of course at greater risk due to there being more political, economic, and geographical instability.

In terms of if the market could be worth moving into then there is a possibility that if the USD pauses in its strengthening or even sees a reversal then it would make the yields’ net value raise which would be a benefit to foreign investors working in USD.

Conclusion of Developed vs Developing

Overall developing markets had better returns than developed markets (Partially South America and Asia). Developing economies began raising interest rates before the developed so are forecast to lower them earlier. They also currently have low debt to GDP compared to developed economy so risks of default are not there unlike some European economies. Lastly if looking to diversify a portfolio or fund then looking to developing economies will help.

What bond should I be looking at with Turbulent markets

Fixed yield bonds are recommended in turbulent markets due to them providing a stable income which is unaffected by the ongoing market forces. However fixed coupon bonds will always suffer when per longed inflation rises happen, due to their value being diminished. This is simply the counter-side of a fixed income because it does not change.

The raising interest rates which always come to combat inflation, have an inverse relationship with bond prices. Meaning as we speak today the prices of bonds are falling with global interest rates rising and looking to peak sometime this year.

Also looking for Bonds with High carry will help protect your investment from losses. Carry is the face value of the bond (amount to purchase), plus the unamortised premiums not yet paid. Higher Carry provides investors of bonds with a cushion between them and potential loss in returns in high yields.

Investing in Bonds: Fallen Angel Bonds

Are fallen Angels worth investing in? A fallen Angel bonds are when a corporation releases investment grade bonds on the market, which due to poor performance have dropped down into the High yield category of bonds.

Buying these types of bonds normally means you will end up paying less due to their normally being under-priced for their market value due to them often recovering some of their losses in the following year. They are also not too risky due to them often being bonds issued by well-established firms.

91% of fallen angels will remain at BB1 grade investments, however just like all investments there are still risks of these individual bonds liquidating and the investor losing all their money. This is why it is always worth investing in funds of these items as it will spreads the invested money around, lowering risk for the investor. In this seminar the company recommended their own fund. The ICE Global Fallen Angel High Yield 10% Constrained Index.

The ICE Global Fallen angel high yield 10% Constrained Index has a better average credit quality than the ICE Global high yield index. Fallen Angels also have lower default rates than ordinary high yield bonds.

While traditional high yields are far more US based issuing. Therefore most High yield bonds operate in USD, exposing any none US based individuals to the currency market which adds an additional level of risk and potential for losses on investments. Fallen angels are more spread in terms of global standing with the bonds having far more EUR and GBP in them due to there being more multinational organisations issuing. This means the fallen angels have less risk and dependency with the US economy (Although it is one of the most stable economies in the world). Finally, Fallen angels have outperformed the high yield bonds, for 14 of the past 18 calendar years with higher returns on upturn years and less losses on downturns years.

Conclusion of Fallen Angel bonds

Overall comment on Angel bonds, they are downgraded investment grades that come from reputable companies. Which can make them safer than alternative high yields that are riskier due to coming from lower quality companies or group bonds. However, overall investment grade would still be a better bet in long term security and growth when it comes to advising clients on bonds.

The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

About the Author

Alexander Pearcy-Caldwell

Well-traveled and resident in two countries, Alex is working as I.T support Aisa Financial Planning and as a Investment researcher for Aisa International s.r.o. He writes about economic data and how it impacts on investment decisions.



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