Annual earnings of 7% despite central banks reducing interest rates.
In the current economic landscape, high-yield bonds have emerged as a yield alternative, offering regular interest payments of over 6% and potential capital gains. This attractive yield level of around 7% is historically appealing compared to other fixed income sectors, providing a source of income and total returns.
Central banks, including the Federal Reserve and the European Central Bank (ECB), have moved away from zero interest rates and are expected to maintain the current elevated interest rate level, as long as there is no serious economic or fiscal imbalance. The Federal Reserve's "jumbo rate hike" was a good signal for the market to maintain economic strength, but a decline of 1.5% is priced in for the next six ECB meetings.
The interest rates were significantly cut in September by both the ECB and the Fed. However, states should be able to afford this interest rate level at least in the medium term, given current inflation rates, which have a debt-reducing effect for states. In contrast, the interest rate level in the US is still significantly higher than in the Eurozone, with the 10-year German bond currently yielding around 2% p.a.
The outlook for high-yield bonds in a low-interest rate environment is cautiously optimistic but mixed. While the yields are higher than investment-grade bonds and Treasuries, economic uncertainty and potential credit risk remain challenges. The U.S. economy is showing modest growth and resilience in earnings, supporting the high-yield market, and default rates remain very low. Credit upgrades have outnumbered downgrades recently, which is positive for high-yield credit quality.
However, investors should be cautious because a slowing economy might stress lower-quality borrowers. Some market commentators recommend limiting exposures to lower-credit-quality bonds in a slowing market, favoring higher-credit-quality intermediate durations instead. The market expects two more rate cuts of 0.25% each in Europe and the US by the end of 2024. These expected rate steps are already largely reflected in the prices of stocks and bonds.
In summary, high-yield bonds at yields around 7% remain an attractive source of income relative to lower-yielding bonds in a low-rate environment, particularly given the current benign default outlook and supportive earnings environment. But investors should carefully weigh the risk of economic slowdown and credit stress, as well as potential volatility amid a still uncertain Fed policy path. High-yield can be a compelling part of a diversified fixed income portfolio but may warrant caution and active management in the current market conditions.
The bond fund managed by Norbert Schmidt, FU Fonds - Bonds Monthly Income (WKN: HAFX9M), is one such fund that investors might consider for its potential to deliver attractive yields in the current market landscape. The fund, launched in 2019, has generated a return of 12.96% over the last 12 months - after costs. However, as with any investment, it's essential to conduct thorough research and consider individual risk tolerance before making investment decisions.
Investors might find the FU Fonds - Bonds Monthly Income, a fund managed by Norbert Schmidt, appealing due to its potential to deliver attractive yields in the current market landscape, given its focus on high-yield bonds. The Federal Reserve and the European Central Bank's maintained interest rate levels could influence the performance of such bonds, as economic uncertainty and potential credit risk remain challenges for this asset class. Therefore, it is crucial for investors to carefully weigh the risk of economic slowdown and credit stress, as well as potential volatility amid a still uncertain Fed policy path, when considering high-yield bonds as part of their investment strategy.
