Seasonality and supply: Will there be a spring bounce for high yield bonds?
Agnieszka Konwent-Morawski and Brent Olson look at seasonal patterns in high yield bonds and how the next few months might develop.
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7 minute read
Key takeaways:
- Modest returns in March for high yield bonds have historically been followed by strong returns in April – typically the best performing month of the year.
- Patterns in issuance (supply) and demand may partly account for returns but we also need to recognise that events can skew returns.
- Consequently, while the economic backdrop and supply/demand outlook currently appear supportive we need to be mindful of both positive and negative event risks in the coming months.
Is there some seasonality to performance in high yield corporate bonds? April has historically been the most rewarding month to hold high yield bonds so should we anticipate a spring bounce for the asset class?
Figure 1 below shows the average monthly total return on the ICE BofA Global High Yield Index. There is something of a quarterly pattern, with high yield typically doing well in the first month of each quarter (except for Q3). Potential explanations for this might be customary blackout periods ahead of earnings releases leading to lower issuance in those months, and heavier coupon reinvestment in January and July creating demand for bonds. Similarly, the relatively weaker returns in the summer months might be attributed to a pick-up in issuance ahead of the vacation period, together with fewer investment professionals at their desks over summer affecting risk sentiment and liquidity.
Figure 1: Average monthly returns on global high yield
Source: Bloomberg, ICE BofA Global High Yield Index, total return in US dollars, 1 January 1998 to 31 December 2024. Past performance does not predict future returns.
It is bit simplistic to lay it all down to a few factors. A glance through history shows that key events played a role in shaping returns. Figure 2 isolates the largest monthly moves up and down, showing the year in which it occurred. The moves are intuitive. For example, we can quickly recognise the sell-off in March 2020 as the COVID pandemic spooked markets, or the collapse of Lehman Brothers in September 2008 and its aftermath a month later that shook market resilience. Conversely, from April and May 2009, we have the big rebound in risk appetite as co-ordinated intervention by authorities globally began to heal markets following the Global Financial Crisis.
Figure 2: Largest returns (+/-) in each month in global high yield (years shown in italics)
Source: Bloomberg, ICE BofA Global High Yield Index, total return in US dollars, 1 January 1998 to 31 December 2024. Past performance does not predict future returns.
We can take the analysis a step further and compare how high yield does relative to government bonds (this is known as the excess return). It should be noted that excess return for the index is quite a complex calculation as each constituent bond in the index is risk-matched against a corresponding government bond.
For this exercise, instead of showing average return, we can look at median return (which eliminates extremes). As Figure 3 shows, once again, April is a strong month, delivering positive excess returns in 22 of the last 27 years (81%). Outside of June and August, the chart shows that high yield bonds have historically typically beaten returns on government bonds. Mathematically, that makes sense. For the 27-year period covered in the chart below, the ICE Global High Yield Index delivered a total return of 381% whilst the ICE US Treasury Index returned 157%.1 We should expect high yield to have more positive than negative months in total and for excess returns on average to be significantly greater than zero over time.
Figure 3: Global high yield bond excess returns over government bonds
Source: Bloomberg, ICE BofA Global High Yield, median monthly excess return % versus Govts, 1 January 1998 to 31 December 2024. The median is the middle return in a data set. Past performance does not predict future returns.
Missing supply
Gross supply of high yield bonds tends to moderate in April after a pick-up in March before a fresh pick-up going into summer. What is interesting so far this year is that an anticipated rise in supply has failed to materialise. In the first six weeks of 2025 there was just US$29 billion of gross non-financial issuance in US high yield, compared with US$37 billion for the same period in 2024. Similarly, in Europe there was just €5 billion of gross non-financial issuance in Euro high yield in the first six weeks of 2025, compared with €6 billion last year.2
If supply continues at current levels, then it may undershoot expectations. It is possible that fewer interest rate cuts in the US (higher for longer) means more companies will look to finance capital expenditure (capex) plans from internal cash flow rather than via debt. Concerns about tariffs (taxes applied to imports) may also be restraining animal spirits. With some key deadlines on tariffs taking effect in March (4 March – Canada and Mexico; 12 March – broader steel and aluminium tariffs) and April (report on reciprocal tariffs between the US and other countries) this might explain corporate reticence, although the Conference Board’s measure of Chief Executive Office (CEO) confidence increased notably in Q1 2025 (February 2025 release).
The risk here is that supply is not abandoned but gets compressed into the fewer remaining months of the year. That said, in recent years we have seen borrowers often look beyond the public high yield bond markets towards private credit, banks and syndicated loans as sources of funding, so we would welcome additional high yield bond supply. We think there is enough appetite for high yield to avoid indigestion but with credit spreads (the difference between the yield on a corporate bond and a government bond of similar maturity) at relatively tight levels, there is potential for some volatility heading into summer.
Ongoing demand
The supply may be missing but the demand is not. Industry fund flows into high yield have been buoyant recently, with a combined net US$3.9 billion entering Euro and US High yield mutual funds and exchange traded funds in the four weeks to 14 February 2025.3
There are plenty of reasons to own high yield bonds. The growth and inflation dynamics remain favourable for US high yield. So far earnings have been robust. In fact, by mid-February, with 77% of S&P 500 companies reporting actual results, the year-on-year earnings growth for Q4 2024 was 16.9%, the highest result since Q4 2021. Furthermore, bottom-up earnings expectations for the US for Q1 2025 have been downgraded, creating a low bar to beat earnings when they are released in April/May.4
For Europe, the European Central Bank remains firmly in rate-cutting mode which should help drive refinancing activity. A possible resolution of the war in Ukraine would be a positive risk event, potentially driving down energy prices in the continent and generating reconstruction opportunities. There is also the possibility of Germany undertaking fiscal stimulus if the composition of its government changes in the February election. Both events have the potential to boost revenues among high yield borrowers.
With the default outlook appearing benign, investors are prepared to overlook tight credit spreads and focus on the relatively attractive yield that high yield bonds offer, currently 7.2% in the US and 5.2% in Europe.5 We remain cautiously optimistic towards the asset class but with credit spreads tight, security selection is becoming increasingly important to performance.
1Source: Bloomberg, ICE BofA Global High Yield Index, ICE BofA US Treasury Index, total return in US dollars, 31 December 1997 to 31 December 2024. Total return comprises both income and capital gain over the period. Past performance does not predict future returns.
2Source: HSBC, Dealogic, 17 February 2025.
3Source: HSBC, Lipper, 12 February 2025.
4Source: Factset, Earnings Insight, 14 February 2025.
5Source: Bloomberg, ICE BofA US High Yield Index, ICE BofA Euro High Yield Index, yield to worst at 18 February 2025. Yields may vary over time and are not guaranteed.
The ICE BofA Euro High Yield Index tracks EUR denominated below investment grade corporate debt publicly issued in the euro domestic of eurobond markets.
The ICE BofA US High Yield Index tracks US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
The ICE BofA Global High Yield Index tracks USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or eurobond markets.
The ICE BofA US Treasury Index tracks the performance of US dollar denominated sovereign debt publicly issued by the US government in the domestic market.
Animal spirits: A term coined by economist John Maynard Keynes to refer to the emotional factors that influence human behaviour, and the impact that this can have on markets and the economy. Often used to describe confidence or exuberance. Call: A callable bond is a bond that can be redeemed (called) early by the issuer prior to the maturity date.
Capital expenditure: Money invested to acquire or upgrade fixed assets such as buildings, machinery, equipment or vehicles in order to maintain or improve operations and foster future growth.
Cash flow: The net amount of cash and cash equivalents transferred in and out of a company.
Corporate bond: A bond issued by a company. Bonds offer a return to investors in the form of periodic payments and the eventual return of the original money invested at issue on the maturity date.
Coupon: A regular interest payment that is paid on a bond, described as a percentage of the face value of an investment. For example, if a bond has a face value of $100 and a 5% annual coupon, the bond will pay $5 a year in interest.
Credit spread is the difference in yield between securities with similar maturity but different credit quality. Widening spreads generally indicate deteriorating creditworthiness of corporate borrowers, and narrowing indicate improving.
Default: The failure of a debtor (such as a bond issuer) to pay interest or to return an original amount loaned when due.
Excess return: This is a measure of relative value that neutralises the interest rate risk of a bond, thereby isolating the portion of return attributable to credit risks. Excess return is equal to a bond’s total return minus the total return of a risk-matched basket of governments. It reflects a) the additional interest income that accrues to the security during the period as a result of a higher starting yield than an equivalent maturity government bond, and b) the effect of any change in credit spread during the period on the price of the security versus the risk-matched government bond.
High yield bond: Also known as a sub-investment grade bond, or ‘junk’ bond. These bonds usually carry a higher risk of the issuer defaulting on their payments, so they are typically issued with a higher interest rate (coupon) to compensate for the additional risk.
Inflation: The rate at which prices of goods and services are rising in the economy.
Investment grade bond: A bond typically issued by governments or companies perceived to have a relatively low risk of defaulting on their payments, reflected in the higher rating given to them by credit ratings agencies.
Issuance: The act of making bonds available to investors by the borrowing (issuing) company, typically through a sale of bonds to the public or financial institutions.
Maturity: The maturity date of a bond is the date when the principal investment (and any final coupon) is paid to investors. Shorter-dated bonds generally mature within 5 years, medium-term bonds within 5 to 10 years, and longer-dated bonds after 10+ years.
Private credit: An asset defined by non-bank lending where the debt is not issued or traded on the public markets.
Refinancing: The process of revising and replacing the terms of an existing borrowing agreement, including replacing debt with new borrowing before or at the time of the debt maturity.
Syndicated loan: A syndicated loan is a loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower.
Yield: The level of income on a security over a set period, typically expressed as a percentage rate. For a bond, at its most simple, this is calculated as the coupon payment divided by the current bond price.
Yield to worst: The lowest yield a bond with a special feature (such as a call option) can achieve provided the issuer does not default. When used to describe a portfolio, this statistic represents the weighted average across all the underlying bonds held.
Volatility measures risk using the dispersion of returns for a given investment. The rate and extent at which the price of a portfolio, security or index moves up and down.
IMPORTANT INFORMATION
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings. products, such as mortgage- and asset-backed securities.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
Marketing Communication.
Important information
Please read the following important information regarding funds related to this article.
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
Specific risks
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- CoCos can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares/units of the issuer or to be partly or wholly written off.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- CoCos can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares/units of the issuer or to be partly or wholly written off.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
- In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
Specific risks
7 minute read
Key takeaways:
- Modest returns in March for high yield bonds have historically been followed by strong returns in April – typically the best performing month of the year.
- Patterns in issuance (supply) and demand may partly account for returns but we also need to recognise that events can skew returns.
- Consequently, while the economic backdrop and supply/demand outlook currently appear supportive we need to be mindful of both positive and negative event risks in the coming months.
Is there some seasonality to performance in high yield corporate bonds? April has historically been the most rewarding month to hold high yield bonds so should we anticipate a spring bounce for the asset class?
Figure 1 below shows the average monthly total return on the ICE BofA Global High Yield Index. There is something of a quarterly pattern, with high yield typically doing well in the first month of each quarter (except for Q3). Potential explanations for this might be customary blackout periods ahead of earnings releases leading to lower issuance in those months, and heavier coupon reinvestment in January and July creating demand for bonds. Similarly, the relatively weaker returns in the summer months might be attributed to a pick-up in issuance ahead of the vacation period, together with fewer investment professionals at their desks over summer affecting risk sentiment and liquidity.
Figure 1: Average monthly returns on global high yield
Source: Bloomberg, ICE BofA Global High Yield Index, total return in US dollars, 1 January 1998 to 31 December 2024. Past performance does not predict future returns.
It is bit simplistic to lay it all down to a few factors. A glance through history shows that key events played a role in shaping returns. Figure 2 isolates the largest monthly moves up and down, showing the year in which it occurred. The moves are intuitive. For example, we can quickly recognise the sell-off in March 2020 as the COVID pandemic spooked markets, or the collapse of Lehman Brothers in September 2008 and its aftermath a month later that shook market resilience. Conversely, from April and May 2009, we have the big rebound in risk appetite as co-ordinated intervention by authorities globally began to heal markets following the Global Financial Crisis.
Figure 2: Largest returns (+/-) in each month in global high yield (years shown in italics)
Source: Bloomberg, ICE BofA Global High Yield Index, total return in US dollars, 1 January 1998 to 31 December 2024. Past performance does not predict future returns.
We can take the analysis a step further and compare how high yield does relative to government bonds (this is known as the excess return). It should be noted that excess return for the index is quite a complex calculation as each constituent bond in the index is risk-matched against a corresponding government bond.
For this exercise, instead of showing average return, we can look at median return (which eliminates extremes). As Figure 3 shows, once again, April is a strong month, delivering positive excess returns in 22 of the last 27 years (81%). Outside of June and August, the chart shows that high yield bonds have historically typically beaten returns on government bonds. Mathematically, that makes sense. For the 27-year period covered in the chart below, the ICE Global High Yield Index delivered a total return of 381% whilst the ICE US Treasury Index returned 157%.1 We should expect high yield to have more positive than negative months in total and for excess returns on average to be significantly greater than zero over time.
Figure 3: Global high yield bond excess returns over government bonds
Source: Bloomberg, ICE BofA Global High Yield, median monthly excess return % versus Govts, 1 January 1998 to 31 December 2024. The median is the middle return in a data set. Past performance does not predict future returns.
Missing supply
Gross supply of high yield bonds tends to moderate in April after a pick-up in March before a fresh pick-up going into summer. What is interesting so far this year is that an anticipated rise in supply has failed to materialise. In the first six weeks of 2025 there was just US$29 billion of gross non-financial issuance in US high yield, compared with US$37 billion for the same period in 2024. Similarly, in Europe there was just €5 billion of gross non-financial issuance in Euro high yield in the first six weeks of 2025, compared with €6 billion last year.2
If supply continues at current levels, then it may undershoot expectations. It is possible that fewer interest rate cuts in the US (higher for longer) means more companies will look to finance capital expenditure (capex) plans from internal cash flow rather than via debt. Concerns about tariffs (taxes applied to imports) may also be restraining animal spirits. With some key deadlines on tariffs taking effect in March (4 March – Canada and Mexico; 12 March – broader steel and aluminium tariffs) and April (report on reciprocal tariffs between the US and other countries) this might explain corporate reticence, although the Conference Board’s measure of Chief Executive Office (CEO) confidence increased notably in Q1 2025 (February 2025 release).
The risk here is that supply is not abandoned but gets compressed into the fewer remaining months of the year. That said, in recent years we have seen borrowers often look beyond the public high yield bond markets towards private credit, banks and syndicated loans as sources of funding, so we would welcome additional high yield bond supply. We think there is enough appetite for high yield to avoid indigestion but with credit spreads (the difference between the yield on a corporate bond and a government bond of similar maturity) at relatively tight levels, there is potential for some volatility heading into summer.
Ongoing demand
The supply may be missing but the demand is not. Industry fund flows into high yield have been buoyant recently, with a combined net US$3.9 billion entering Euro and US High yield mutual funds and exchange traded funds in the four weeks to 14 February 2025.3
There are plenty of reasons to own high yield bonds. The growth and inflation dynamics remain favourable for US high yield. So far earnings have been robust. In fact, by mid-February, with 77% of S&P 500 companies reporting actual results, the year-on-year earnings growth for Q4 2024 was 16.9%, the highest result since Q4 2021. Furthermore, bottom-up earnings expectations for the US for Q1 2025 have been downgraded, creating a low bar to beat earnings when they are released in April/May.4
For Europe, the European Central Bank remains firmly in rate-cutting mode which should help drive refinancing activity. A possible resolution of the war in Ukraine would be a positive risk event, potentially driving down energy prices in the continent and generating reconstruction opportunities. There is also the possibility of Germany undertaking fiscal stimulus if the composition of its government changes in the February election. Both events have the potential to boost revenues among high yield borrowers.
With the default outlook appearing benign, investors are prepared to overlook tight credit spreads and focus on the relatively attractive yield that high yield bonds offer, currently 7.2% in the US and 5.2% in Europe.5 We remain cautiously optimistic towards the asset class but with credit spreads tight, security selection is becoming increasingly important to performance.
1Source: Bloomberg, ICE BofA Global High Yield Index, ICE BofA US Treasury Index, total return in US dollars, 31 December 1997 to 31 December 2024. Total return comprises both income and capital gain over the period. Past performance does not predict future returns.
2Source: HSBC, Dealogic, 17 February 2025.
3Source: HSBC, Lipper, 12 February 2025.
4Source: Factset, Earnings Insight, 14 February 2025.
5Source: Bloomberg, ICE BofA US High Yield Index, ICE BofA Euro High Yield Index, yield to worst at 18 February 2025. Yields may vary over time and are not guaranteed.
The ICE BofA Euro High Yield Index tracks EUR denominated below investment grade corporate debt publicly issued in the euro domestic of eurobond markets.
The ICE BofA US High Yield Index tracks US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
The ICE BofA Global High Yield Index tracks USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or eurobond markets.
The ICE BofA US Treasury Index tracks the performance of US dollar denominated sovereign debt publicly issued by the US government in the domestic market.
Animal spirits: A term coined by economist John Maynard Keynes to refer to the emotional factors that influence human behaviour, and the impact that this can have on markets and the economy. Often used to describe confidence or exuberance. Call: A callable bond is a bond that can be redeemed (called) early by the issuer prior to the maturity date.
Capital expenditure: Money invested to acquire or upgrade fixed assets such as buildings, machinery, equipment or vehicles in order to maintain or improve operations and foster future growth.
Cash flow: The net amount of cash and cash equivalents transferred in and out of a company.
Corporate bond: A bond issued by a company. Bonds offer a return to investors in the form of periodic payments and the eventual return of the original money invested at issue on the maturity date.
Coupon: A regular interest payment that is paid on a bond, described as a percentage of the face value of an investment. For example, if a bond has a face value of $100 and a 5% annual coupon, the bond will pay $5 a year in interest.
Credit spread is the difference in yield between securities with similar maturity but different credit quality. Widening spreads generally indicate deteriorating creditworthiness of corporate borrowers, and narrowing indicate improving.
Default: The failure of a debtor (such as a bond issuer) to pay interest or to return an original amount loaned when due.
Excess return: This is a measure of relative value that neutralises the interest rate risk of a bond, thereby isolating the portion of return attributable to credit risks. Excess return is equal to a bond’s total return minus the total return of a risk-matched basket of governments. It reflects a) the additional interest income that accrues to the security during the period as a result of a higher starting yield than an equivalent maturity government bond, and b) the effect of any change in credit spread during the period on the price of the security versus the risk-matched government bond.
High yield bond: Also known as a sub-investment grade bond, or ‘junk’ bond. These bonds usually carry a higher risk of the issuer defaulting on their payments, so they are typically issued with a higher interest rate (coupon) to compensate for the additional risk.
Inflation: The rate at which prices of goods and services are rising in the economy.
Investment grade bond: A bond typically issued by governments or companies perceived to have a relatively low risk of defaulting on their payments, reflected in the higher rating given to them by credit ratings agencies.
Issuance: The act of making bonds available to investors by the borrowing (issuing) company, typically through a sale of bonds to the public or financial institutions.
Maturity: The maturity date of a bond is the date when the principal investment (and any final coupon) is paid to investors. Shorter-dated bonds generally mature within 5 years, medium-term bonds within 5 to 10 years, and longer-dated bonds after 10+ years.
Private credit: An asset defined by non-bank lending where the debt is not issued or traded on the public markets.
Refinancing: The process of revising and replacing the terms of an existing borrowing agreement, including replacing debt with new borrowing before or at the time of the debt maturity.
Syndicated loan: A syndicated loan is a loan offered by a group of lenders (called a syndicate) who work together to provide funds for a single borrower.
Yield: The level of income on a security over a set period, typically expressed as a percentage rate. For a bond, at its most simple, this is calculated as the coupon payment divided by the current bond price.
Yield to worst: The lowest yield a bond with a special feature (such as a call option) can achieve provided the issuer does not default. When used to describe a portfolio, this statistic represents the weighted average across all the underlying bonds held.
Volatility measures risk using the dispersion of returns for a given investment. The rate and extent at which the price of a portfolio, security or index moves up and down.
IMPORTANT INFORMATION
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings. products, such as mortgage- and asset-backed securities.