Financial Quotient

What are high-yield bonds?

ST ILLUSTRATION: CEL GULAPA

WHAT DOES IT MEAN?

A bond is a financial instrument that governments, companies and others use to borrow money. Investors who buy a bond issued by a company or government agree to be repaid at fixed intervals by a specific date.

A rating agency grades a bond based on the credit-worthiness of the issuer so investors can decide what level of risk they are comfortable with. High-yield bonds typically pay a higher coupon for investors who are willing to hold bonds with a lower credit rating than investment-grade bonds. Generally, the rating of a high-yield bond would be "BB+" or lower by S&P Global Ratings or Fitch Rating, and "Ba1" or lower by Moody's.

High-yield bonds may offer investors a higher return than investment-grade bonds because they can be more exposed to credit risk and capital loss. To offset the higher risks, high-yield bond issuers typically pay a higher coupon.

WHY IS IT IMPORTANT?

Bonds offer certain advantages as they broadly carry less risk than stocks and provide a fixed amount of income at regular intervals in the form of coupon payments.

Bonds also help to diversify one's investment portfolio, as investing in a blend of stocks, bonds and other asset classes can enable investors to build a more balanced portfolio.

Investing in high-yield bonds can be helpful because they generally provide higher yield than government bonds and investment-grade bonds, even in an environment with low interest rates.

Furthermore, as central banks are cutting interest rates globally and the performance of equity markets is increasingly volatile due to geopolitical uncertainty, high yield may become a sought-after asset class for investors who are comfortable assuming higher risk in the bond space in an effort to capture higher income.

As always, investors should understand their risk profile and consult their financial advisers if they decide to invest in high-yield bonds.

IF YOU WANT TO USE THE TERM, JUST SAY:

"During periods of low interest rates and high volatility, investors in search of a higher income can look to high-yield bonds to complement their portfolio."

• The writer is head of Singapore and South-east Asia, BlackRock.

A version of this article appeared in the print edition of The Sunday Times on September 15, 2019, with the headline 'What are high-yield bonds?'. Print Edition | Subscribe