Editor’s note: This article was first published in July 2010. The US share of high-yield issuance, the upward trend of European high-yield bonds and the 8% and 10% figures it cites reflect that time.
High-yield bonds are bonds that receive a lower initial credit rating. They pay a higher interest rate than Treasury bonds. High-yield bonds also offer strong potential for capital gains if the rating is upgraded, if the country’s economy improves or if the issuing company performs better.
Investing in high-yield bonds also means taking on more risk. The issuers of these bonds are more likely to miss interest payments on the scheduled dates.
Clearly, one way to make this kind of bond investment a little safer is to buy bonds from countries within the emerging investment markets.
Who issues high-yield bonds
Although the high-yield market is becoming more diverse, the main issuer of these bonds is still North America, led by the United States, which accounts for the largest share of issuance.
Today there are also European high-yield bonds, which have been trending upward in recent years.
Among high-yield bond issuers we also find companies entering a period of expansion and opening new branches, as well as start-ups, which attract private investors by paying high interest rates. That gives you an idea of the risk this kind of investment carries: the company may grow, or it may not survive its first year.
To sum up: with high-yield bonds, once we’ve studied the viability of the company and the people running it, if things work out we’ll earn one of the highest returns on the market, sometimes as much as 10%. If our expectations aren’t met, we’ll have entered one of the riskiest markets.
They aren’t high-yield bonds, but we can compare this with the case of Nueva Rumasa, run by Ruiz-Mateos. At present it is paying its investors 8% interest, and at its first review it showed growth of 10% a year.
Further reading
- What Arthur Rock looks at before investing
- Investing in emerging markets
- 7 types of investors and levels of investing
Featured image: William Creswell, Public domain, via Flickr.
