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

Aug 12th, 2019 | By | Category: Fixed Income

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By Terry Wood, Head of ETF Portfolio Management, EMEA at BMO Global Asset Management.

Terry Wood, Head of ETF Portfolio Management, EMEA at BMO Global Asset Management.

Terry Wood, Head of ETF Portfolio Management, EMEA at BMO Global Asset Management.

With the UK due to leave the EU on 31 October, the Confederation of British Industry 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.

Source: BMO GAM.

Source: BMO GAM.

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.

Source: BMO GAM.

Source: BMO GAM.

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 (ZHYG LN) has distributed 4.8% over the last 12 months (as of 26 July 2019), significantly more than the global equity benchmark’s dividend yield.

As well as providing diversified geographical exposure, currency hedging is included in the ongoing charges figure (OCF) of 0.35%, offering one of the most cost-efficient ways to access this asset class.

Source: BMO GAM.

Source: BMO GAM.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

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