What are High Yield Bonds?

High yield bonds are also known as speculative or junk bonds. Bonds falling under this category are typically issued by companies with weaker financials and/or cash flow stability such that they are deemed to have higher probability of default. The name “junk bond” was also given to this group of bonds as a result of these bonds’ inability to repay its debtors historically. They offer a higher yield compared to investment grade bonds as investors will need to be compensated for the higher risk of holding onto the bond.

Growth of the High Yield Bond Market in Asia

The high yield bond market in Asia has grown significantly over the past decade. Total high yield bond issuance volume in 2008 stood at a humble $3 billion. This has grown over 27x over a period of 11 years to $83 billion with over a month remaining in the year.

The Asian high yield bond market is dominated by Chinese companies, particularly ones operating in the real estate sector. These companies have found a strong demand for their bonds from asset managers and individual investors across Asia amid a low interest rate environment world over. Another major segment of the high yield bond market is emerging and frontier countries’ sovereign bonds. Over the past few years, investors have lapped up new bond issues from countries such as Ghana, Lebanon, Tajikistan, Maldives and Papua New Guinea.

High Yield vs. Investment Grade

We have compared two bonds from the same industry and the same country to understand how high yield bonds stack up against investment grade bonds in secondary markets. The high yield bond is Tesla’s 5.3% bond due 2025, which received a B- rating from S&P given that it is a loss-making company with limited cash reserves. On the other hand, is General Motor’s 4% bond due 2025, which received a BBB rating.

*As of 20 November 2019

Source: BondEvalue

After issuance, Tesla’s bond is trading at a discount (below 100) while General Motor’s bond is trading at a premium (above 100). This is in line with the current economic environment wherein investors are moving out of risky assets and into safer options. Another point to note is that high yield bonds tend to exhibit more volatility in the secondary markets as compared to investment grade bonds. This can be seen in the above chart where Tesla’s bond price fluctuates more that the General Motors’ bond price.

Fallen angels and rising stars

Fallen angels is the term given to bonds at the lower end of the investment grade spectrum (BBB) that are downgraded into junk territory (BB+ or lower) during the life of the bond. In 2016, 18% of low BBB rated companies were downgraded from investment grade and their bonds were relabelled as high yield bonds.

It is possible for high yield bonds to receive rating upgrades and move into investment grade category. These bonds are known as “rising stars”. This often happens to companies new to the debt market and yet to have a credit history of debt repayment, where their creditworthiness is unknown and ought to offer a premium yield when they first issue bonds. If the company continues to improve its financials and shown to have great future prospects, its credit ratings will be upgraded.



Show Buttons
Hide Buttons