Bonds – Junk bonds: what's in a name?

Sometimes names can tell you all you need to know, but sometimes they can be misleading. Take global high yield debt – a.k.a. “junk bonds” or “sub-investment grade debt”, often maligned as being risky and often avoided in investor portfolios for this reason. Risk though is relative and while they clearly carry more risk than their investment grade counterparts, they can and do play an important role in generating returns for investors and typically with less risk than often assumed. There is no free lunch in investing. To access high yields investors need to assume some risk. One way to do this is to step down the capital structure, taking exposure to “subordinated” or lower ranking debt issues, often by good quality, investment grade issuers (like Australian bank hybrids). Another way is to invest in the debt of lower rated borrowers. For many the GFC was an awakening to the risks inherent in credit. While this was a scary experience for many it also created a “once in a lifetime” opportunity to invest in credit across the risk curve. (VIEW LINK)