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High Yield Corporate Bond Market

At WiseAlpha we are passionate about creating a fairer investment world, one where everyone can invest in the corporate bonds of some of the UK’s best-known companies. Previously, these investments were only accessible to financial institutions or the ultra-wealthy who could afford to make a minimum investment of at-least £100,000 per individual bond.

We present aggregate bond market statistics aimed at providing investors with clarity over this previously elusive asset class.

Historical Returns of UK Equities and Corporate Bonds

The chart below plots the returns of key indices used by the industry to assess the performance of equities, investment-grade corporate bonds, and high yield (HY) corporate bonds. Astonishingly, both investment grade and high yield bonds have outperformed UK equities over the last 20 years both in terms of returns and price volatility.

UK Equities are represented by the FTSE All Share Total Return Index, £ High Yield Bonds by the Bank of America Merrill Lynch Sterling High Yield Index, £ Investment Grade Bonds by the Barclays Sterling Corporate Investment Grade Index, and € High Yield Bonds by the Credit Suisse Western European High Yield Index [1].

The equity index includes dividend payments while the bond indices include interest payments, principal repayments, and default distributions [2].

Source: Bloomberg and ICE Data Services. Data as of 15 July 2019.

Comparing P2P Returns with Investing in High Yield Corporate Bonds

Investors familiar with P2P but new to corporate bonds often ask - how do the returns from lending to household names (e.g. Virgin Media) stack up to the returns available from lending via P2P sites?

Using data from the leading P2P performance verification service Brismo (AltFi Data) and asset class returns from Bloomberg and ICE Data Services, we find that HY corporate bonds outperformed the P2P platform average over a 1 and 3-year period.

1 Year Net Return 3 Year Net Return As of Date
Av. of eight P2P platforms [3] 5.2% 17.9% 31 May to 30 June 2019
£ High Yield Bonds 5.8% 23.5% 30 June 2019
£ Investment Grade Bonds 6.4% 14.0% 30 June 2019
UK Equities 0.9% 29.5% 30 June 2019
Source: Brismo (AltFi Data), Bloomberg and ICE Data Services. Data as of 16 July 2019.

Historical Default and Default Loss Rates for High Yield Bonds

A key consideration for bond investors is the strength of the business they are lending to. At issuance, arranging banks meet with investors to market the bonds and negotiate key terms. During this period, most bonds are also assigned ratings by ratings agencies.

The comprehensive issuance process in institutional markets helps set a bond’s coupon at a level that matches the market’s perception of risk-adjusted return. Issuers perceived to have comparatively weaker financial strength must pay a higher coupon to investors.

HY corporate bonds are typically issued with a maturity of five to seven years, and during the life of the bond the credit performance of the company may strengthen or weaken. The price of the bond will change to reflect this. Unfortunately companies are sometimes unable to pay back their bond holders the lent money and so they default. In the chart below we report the historical frequency of this occurrence.

The 12 Months Default Rate measures the proportion of companies that failed to repay their bonds in the last 12 months [4]. The lower the rate the better, and it has been in the range of 0.3-1.4% between July 2015 and July 2019.

Many bonds are secured, meaning they are backed by assets, which, in the event of default, will be sold to recover funds for bond holders.

The 12 Months Default Loss Rate measures the amount lost after the sale of assets to recover funds for bondholders [5]. Between July 2015 and July 2019 corporate bondholders lost between 0.23% and 1% due to defaults.

Source: Credit Suisse. Data as of 15 July 2019

European High Yield Corporate Bond Market

The European High Yield Corporate Bond Market is a large, well established, asset class which continues to develop with the market value of outstanding bonds growing from €108 billion in 2009 to €499 billion in 2019.

Source: Credit Suisse. Data as of 15 July 2019.

UK Pension Fund Asset Allocation 2018

With strong historical returns and low default loss rates, bonds have become increasingly sought-after among pension funds. In 2018 UK Pension Funds allocated 53% of their portfolios to bonds, topping equities at 32% to make bonds their favorite asset class.

Source: Willis Towers Watson, Global Pension Assets Study 2019

Footnotes:

  1. FTSE All Share Total Return Index: [ASXTR], Bank of America Merrill Lynch Sterling High Yield Index [HL00], Barclays Sterling Corporate Investment Grade Index: [LC61TRGU], and Credit Suisse Western European High Yield Index [DLJNVLUE].
  2. To make the equity and bond indices directly comparable, they have all been rebased to an initial value of 100% that was computed based on the actual index value on the initial date 1 Jan 1999.
  3. Average of all platforms that have reported 1 year and 3 year net returns as of 31 May 2019 or later. These were: FlexFunding, Crealsa, October, RateSetter, Crowdproperty, LandBay, Assetz Capital, and Prosper.
  4. The 12 Month Default Rate is a percent value, calculated by taking the par-value of bonds that have defaulted in the last 12 months prior to a point in time and dividing that figure by the total par-value of bonds outstanding in the market at the time. The bond population used is the entire Western European High Yield market.
  5. The 12 Month Default Loss Rate calculation gives the principal loss of the bondholders, adjusting for the recovery value of the defaulted bonds.

Confused by terminology? Check out our Glossary

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