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For income-oriented investors, now is the time for bonds. As rates have shifted higher, coupon rates on newly issued bonds have continued to climb higher, offering income opportunities rarely seen in recent years. Notably, we think high yield bonds are worth a closer look as they provide high income and compelling total return potential.
Turning point ahead: High cash rates will fade, look to bonds
With expectations for central banks to cut rates in the future, we are reminded that elevated cash rates won’t last forever. While cash and money market funds provided steady income in recent years, continuing to hold cash will eventually prove to be costly as money market rates reset lower. We believe it is time to consider re-allocating from cash to fixed income. We believe that now is the time to seize opportunities in the bond market to add income and pursue enhanced total returns.
Carry on: Harvesting income in high yield bonds
When it comes to high yield bonds, some investors have been hesitant to add exposure given tight spread levels and concerns about price volatility amid macro uncertainty. However, we mustn’t underestimate the power of carry. After all, the total return for bonds consists of income (coupons) and price (capital) returns. Although price movements are a component, income has been the largest driver of fixed income total returns over the long term (Exhibit 1). The income, or carry, from coupons can provide a buffer against price movements. While prices can be volatile, income provides a steady constant over time.
Exhibit 1: Income is primary driver of returns in the high yield market
Source: Bloomberg, ICE BofA. As of 31 March 2024. Reflects the cumulative price and income return for the ICE BofA Global High Yield Constrained (HW0C) index. Past performance is not a guide to future performance.
Opportunities now: Locking in high income in higher-quality bonds
As rates have shifted higher, newly issued bonds have come to market with higher coupons. However, it is not just the riskiest high yield bonds that offer attractive coupon rates. Rather than stretching for unnecessary risk in CCCs and below, we are uncovering high income opportunities across the ratings spectrum. For example, many BB or B-rated bonds offer double-digit coupon rates, and can provide a sweet spot for investors from a risk/return perspective. Companies in this space can still afford to pay higher coupon rates, but are also better set up to weather a potential economic slowdown. In our view, this is an opportune time to lock in high coupons in higher-quality bonds and add steady income.
Exhibit 2: Examples of portfolio holdings with high coupon rates
Source: Bloomberg and ICE BofA. As of 30 April 2024.
Don’t underestimate the power of carry
As economic headwinds persist and high yield credit spreads remain tight, it is understandable why some investors might be cautious on high yield bonds. While spreads could widen, don’t underestimate the power of carry. After all, income is the dominant driver of returns over the long term. In addition, as the saying goes, it is time in the market, not timing the market that matters. For income-oriented investors, now is the time to consider bonds.
This material is provided by Aegon Asset Management (Aegon AM) as general information and is intended exclusively for institutional and wholesale investors, as well as professional clients (as defined by local laws and regulation) and other Aegon AM stakeholders.
This document is for informational purposes only in connection with the marketing and advertising of products and services, and is not investment research, advice or a recommendation. It shall not constitute an offer to sell or the solicitation to buy any investment nor shall any offer of products or services be made to any person in any jurisdiction where unlawful or unauthorized. Any opinions, estimates, or forecasts expressed are the current views of the author(s) at the time of publication and are subject to change without notice. The research taken into account in this document may or may not have been used for or be consistent with all Aegon AM investment strategies. References to securities, asset classes and financial markets are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions. It has not been prepared in accordance with any legal requirements designed to promote the independence of investment research, and may have been acted upon by Aegon AM and Aegon AM staff for their own purposes.
The information contained in this material does not take into account any investor's investment objectives, particular needs, or financial situation. It should not be considered a comprehensive statement on any matter and should not be relied upon as such. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to any particular investor. Reliance upon information in this material is at the sole discretion of the recipient. Investors should consult their investment professional prior to making an investment decision. Aegon Asset Management is under no obligation, expressed or implied, to update the information contained herein. Neither Aegon Asset Management nor any of its affiliated entities are undertaking to provide impartial investment advice or give advice in a fiduciary capacity forpurposes of any applicable US federal or state law or regulation. By receiving this communication, you agree with the intended purpose described above.
Past performance is not a guide to future performance. All investments contain risk and may lose value. This document contains "forward-looking statements" which are based on Aegon AM's beliefs, as well as on a number of assumptions concerning future events, based on information currently available. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance, and actual outcomes and returns may differ materially from statements set forth herein.
The following Aegon affiliates are collectively referred to herein as Aegon Asset Management: Aegon USA Investment Management, LLC (Aegon AM US), Aegon USA Realty Advisors, LLC (Aegon RA), Aegon Asset Management UK plc (Aegon AM UK), and Aegon Investment Management B.V. (Aegon AM NL).Each of these Aegon Asset Management entities is a wholly owned subsidiary of Aegon Ltd. In addition, Aegon Private Fund Management (Shanghai) Co., a partially owned affiliate, may also conduct certain business activities under the Aegon Asset Management brand.
Aegon AM UK is authorised and regulated by the Financial Conduct Authority (FRN: 144267) and is additionally a registered investment adviser with the United States (US) Securities and Exchange Commission (SEC). Aegon AM US and Aegon RA are both US SEC registered investment advisers.
Mark Benbow, portfolio manager, is a member of the global leveraged finance team. He specialises in high yield bonds and co-manages our global high yield strategies.
