Reconsidering risk & reward: the case for high yield bonds in volatile times

As central banks across the globe reconsider monetary easing, the search for yield becomes more challenging.

Terry Wood

Director, Head of ETF Portfolio Management, EMEA

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Risk Disclaimer

The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested. Past performance should not be seen as an indication of future performance.

Opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

 

Economic and political challenges across major economies

With the UK due to leave the EU on 31 October, the CBI has warned that neither the UK nor the EU is ready for no deal. Europe is already grappling with its own economic and political issues, and further afield, the ongoing US-China trade war is starting to weigh meaningfully on sentiment.

Lower your volatility with higher yield bonds

Central banks have moved back to lowering rates, and although corporate bonds should partially benefit there is the potential for uncertainties to filter into corporate earnings. This impacts both equity and bond prices and in particular, the ability of investment grade bonds to provide a decent yield.

So, it is worthwhile re-assessing the potential reward relative to risk an investor should expect from bonds. Although a cautionary stance should be forefront in such unpredictable times, in an environment where recessionary concerns are muted by looser monetary policy, high yield bonds could continue to offer more attractive returns compared to their lower risk investment grade counterparts.

 

Risk Disclaimer

The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested. Past performance should not be seen as an indication of future performance.

Opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Shares purchased on the secondary market cannot usually be sold directly back to the Fund. Secondary market investors must buy and sell ETF Shares with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current Net Asset Value per Share when buying ETF Shares and may receive less than the current Net Asset Value per Share when selling them.

As a substitute risk-on asset class, over the longer term, global high yield bonds have provided equity-like returns with lower volatility than equities, especially when currency hedging is considered.

BMO manages a range of targeted ETFs, with one product specifically tracking the Bloomberg Barclays Global HY Corp Hedged to GBP Index.

The BMO Bloomberg Barclays Global High Yield (GBP Hedged) UCITS ETF has distributed 4.8% over the last 12 months (to 26 July), significantly more than the global equity benchmark’s dividend yield. As well as providing diversified geographical exposure, currency hedging is included in the OCF of 0.35% p.a. offering one of the most cost efficient ways to access this asset class.

 

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