Corporate Fixed Income
Everything you need to know about the emissions made by companies
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The fixed income market, in all its typologies and as we pointed out in all our publications referring to this asset, is the largest financial market in the world, where governments, companies and local administrations go in search of financing.
If we focus on the emissions made by companies, these are usually differentiated into two groups according to the company’s payment capacity: investment grade (issuers with a high payment capacity) and high yield (or high yield) (issuers with lower payment capacity):
- Degree of investment or Credit : the subset formed by fixed income issues made by companies with a high capacity to pay.
- High Yield : the subset formed by the emissions made by companies with lower payment capacity. In this case, since they are companies with reduced payment capacity and, therefore, a greater risk of default, they offer higher coupons than the investment grade emissions, to compensate for the increase in risk.
These markets are usually classified geographically, so the investor will find funds from Crédito Europa, Crédito USA and Crédito Global , on the one hand, and High Yield Europe, High Yield USA and High Yield Global , on the other. In addition, in each geography, we can find funds focused on the short term or the entire maturity spectrum.
The evolution of these funds will be influenced by movements in interest rates and changes in the financial health of the companies in which they are invested. In the case of high yield, the evolution of the financial health of the companies in which it is invested acquires special importance, and in this sense, correctly selecting the companies that fall within the portfolio, as well as the companies that must be discarded. all costs, is key to the profitability of the fund.
Vocabulary to keep in mind
In addition to the definitions already mentioned for any investment in fixed income, within the funds that invest in the credit market we would highlight the following definitions:
- Type curve : also known as the temporary structure of interest rates, it is the graphic representation that relates the interest rate to the different terms to which the debt has been issued. In a normal situation, it is growing, that is, the longer the term, the higher the interest rate.
- Rating : credit quality granted by the rating agencies, which reflects the solvency of the issuer analyzed. The best ratings are called investment grade, while the worst are known as high yield.
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Why is it interesting to invest in corporate bonds?
- Collection of periodic interests .
- Protection of capital , by recovering the initial amount of the investment at the end of the life of the bond.
- Diversification , since it allows to reduce the risk of portfolios when combined with other assets such as Variable Income.
To take into account when investing in corporate bonds
- The payment capacity of the company to which we lend is key.
- If he is not able to pay the interest and return the amount within the established period, the investor could lose part or all of his money .
- The term of the loan is also important. It is easier to know if the entity will be able to return the money within 5 years than within 30, since in such long periods many things can happen.
- There are several private agencies in charge of analyzing the different issuers, and establishing a rating or rating based on their credit quality. The best known are Standard & Poor’s, Moody’s and Fitch. This allows you to compare different issuers with the same criteria.
The fund managers , in the cards that they usually make from the funds periodically, publish the average rating of the group of bonds in which the fund invests, together with other data of interest.