Fixed Income and COVID-19

The worldwide spread of the COVID-19 virus (coronavirus) in recent weeks has led to strong movements in the fixed-income markets.

The possible impact of the new virus on the world economy (its precise dimensions are still unknown) and a marked drop in oil prices (caused by the announced increase in production by Saudi Arabia) have pushed investors to take refuge in developed government bonds instead of high-yield corporate bonds; the latter are more sensitive to the economic cycle and registered price drops of around 10% in the last two weeks.

Investment in short-term High-Yield Bond

US short-term high-yield corporate bonds: Short-term debt (bonds), between one and three years in maturity, issued by companies that have received a low rating from credit rating agencies and therefore offer a higher coupon rate than investment-grade corporate bonds, which provide greater solvency.

Historical yields and risk

In the past, this asset has offered an annual yield of 6.9%, taking into account that its annual risk (volatility) has been only 3.7%, we can say that it is probably one of the most attractive assets in terms of risk/return.

Comparison of historical yield and risk of various US assets (from 1997 to 2020)

Data 10.03.2020

Current annual yield

Short-term (short duration) US high-yield corporate bonds in dollars: annual return (IRR) of around 7.5%.

Investment vehicles

We believe that the best way to invest in this type of bond could be through investment funds. Since the main risk of this asset lies in the default rate, it is advisable to delegate the investment to specialist managers who have the ability to analyze the risks of each company and to build a well-diversified portfolio, avoiding excessive concentration that could be heavily penalised by an increase in corporate default rates.