A new blue ocean for high-yield bonds on the gold rush
With the increasing depth and breadth of the Chinese bond market, some unexpected investment opportunities have emerged. High-yield bonds, this new blue ocean of investment, are gradually entering the investors' field of vision.
High-yield bonds are still in a rapid development stage, but they already have a considerable market capacity. Although the market is not yet mature, institutional investors have gradually recognized the investment value of high-yield bonds.
China Zhongji Investment, based on macroeconomic analysis and asset allocation, resolutely participated in the high-yield bond market and has now achieved good returns.
1. What are high-yield bonds?
High-yield bonds are bonds issued by industrial companies, financial institutions, and public utilities and rated below investment grade by at least one independent credit rating agency, and their coupon rates are higher than those of investment-grade bonds.
In 1977, Texas International Company issued the first high-yield bond. After decades of development, the high-yield bond market has become an important force in the international financial market. According to Reuters data, by the end of 2011, the market size of high-yield bonds in the United States had reached US$1.5 trillion, accounting for 18.94% of the corporate bond market.
2. Sources of high-yield bonds
High-yield bond issuers are typically divided into two types. One is a company that once enjoyed investment-grade ratings but whose bond rating has been downgraded due to a decline in profitability and other qualifications; it is commonly known as “fallen angels”. The other is a company in its start-up phase whose rating has not yet reflected its future development potential; it is commonly known as “rising stars”.
From the issuers, we can see that there are many value investment opportunities in high-yield bonds, with huge profit margins.
3. Current situation and opportunities in the high-yield bond market
With the macroeconomic credit expansion and regulatory expansion of the bond market from 2014 to 2016, the credit center of bond-issuing enterprises has gradually decreased. In the environment of the bond market bull market and asset shortage in 2016, county-level urban investment enterprises and low- and medium-rated private enterprises enjoyed a low-interest rate and convenient issuance market environment, and the scale of bond financing increased sharply.
However, the marginal tightening of monetary policy and the process of deleveraging in the financial sector since 2017 have put enormous liquidity pressure on bond issuers with concentrated maturities, resulting in a large number of defaulted and near-defaulted bonds, which finally reached a peak in credit risk in 2018.
After a series of adjustments, domestic investment institutions have not yet made timely adjustments in terms of risk culture and internal control mechanisms. The trading methods under the influence of the "optimal assessment" behavior model have led to a serious lack of pricing effectiveness in the high-yield bond market.
The immaturity of the market and the "deviation" in institutional behavior have created opportunities to earn excess returns in the high-yield bond market.
Since 2019, the effectiveness of the high-yield bond market has improved significantly, especially in the first five months, when opportunities for high-quality purchase prices were far fewer than last year. However, since June, under the impact of the Baoshang incident, the situation of liquidity stratification and credit expansion stratification has emerged, once again providing a good buying opportunity for the high-yield bond market.
4. China Zhongji Investment explores the high-yield bond market
Based on macroeconomic analysis and asset allocation, China Zhongji Investment believes that the high-yield bond market has broad prospects and conforms to the company's risk preference and comparative advantages in research and investment capabilities. The company decisively organized the research and investment team to join the ranks of exploring high-yield bonds.
To this end, we have established a full-process management method covering macroeconomic credit environment analysis, individual bond model calculation, and trading prices, and seized market opportunities in a timely manner, establishing a high-yield bond portfolio covering urban investment and some high-quality private enterprises. In addition, controllable funds were used to appropriately allocate junk bonds that have already experienced obvious risk events.
In the future, the company will face the opportunities and challenges of this emerging asset class with a proactive and rigorous attitude, establish a more perfect research and investment system, enrich the existing asset portfolio, and continue to pursue risk-controllable high-yield assets for shareholders and clients.
