The bond market as nobody has never explained
The three main categories of the bond issues are:
- SOVEREIGN BOND = government bonds issued by a nation to get cash in exchange for interest
- CORPORATE BOND = bonds issued by companies to get cash in exchange for interest
- SUPERNATIONAL BOND = bonds issued by international organizations such as the European Investment Bank (EIB) or the World Bank (WB).
Within these three areas, there are many other subgroups including high yield bonds and emerging market bonds that we will discuss in this analysis.
In a macroeconomic background with intrest rates in the amount of zero, the investors focus on types of bonds different by government bonds that do not have attractive yields anymore.
The two mentioned categories, however, have a bigger volatility (price fluctuations) than a government bond, with higher risk for the capital to turn into a negative or positive direction.
Their trend and their flow coupons (interest) are influenced by two factors:
- the discount rate is set by the central banks. If it increases, the value of stocks decreases, if it decreases, the value of the stocks increases.
- the spread (or risk premium) is regulated by the market. If it increases, the value of stocks decreases, if it decreases, the value of the stocks increases.
As we prouved with the analysis of the S&P500, media do not actually help us to get the right chances from these asset classes.
Currently the discount rate is zero, or close to zero, in almost all countries of the world. Here it will probably stay for several years. The investment choice will then focus on the spread. But when can the spread be an opportunity?
That’s the trend of the spread on emerging markets in the past…
…and the hig yeald spread.
Buying these bonds when the spread is higher than its historical average you can have two advantages:
- Higher interest (coupons) of 10/15%.
- The possibility of having a strong increase in the capital value and consequently the reduction of the spread.
But are these bonds an opportunity TODAY?