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Corporate bondsWhy bond funds are currently a risky investment

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At first glance, it sounds like good news: after the record outflows in March, the fund industry again collected a lot of new money in April. The investors who had previously brought their powder to dryness returned to the market in droves. So far, so gratifying, but the downer comes now: Because what did the investors buy in April, mostly private investors? They stormed into bond funds. In those supposedly safer papers, which are often said to give the depot more stability. Of the approximately 47 billion euros that flowed back into the European fund market in April, almost 30 billion ended up in the bond sector. There, however, investors did not buy government bonds – which can be understood given the unattractive low yields – instead they bought corporate bonds. And with a lot of high-yield bonds, the so-called high yield bonds.

Now, of course, high interest rates sound tempting. Especially in these times when many other fixed-income yielders are no longer able to generate any noteworthy income. And many buyers were likely to be tempted to invest in the fact that central banks around the world were issuing a license to the bond markets by throwing tons of money on the market and announcing that before the bond market dried up due to the free fall in prices, they would also become more risky Buy bonds, especially corporate bonds.

The European Central Bank ECB will also announce its further route in the coming week and will probably confirm this strategy, market observers believe. It basically has no other chance, because it has already pumped around EUR 220 billion into the bond market. And their budget will soon be exhausted – too fast to cushion the tough fall season. Therefore, it will probably extend its purchase program and continue to buy bonds at least until the end of the year, if not until the end of the first quarter of 2021. The worst is likely to be over by then at the latest.

It’s not for nothing that they are called “scrap bonds”

That sounds like a sure thing for bond buyers: more money in the bond market means more stability. And there is truly enough choice of new paper: growth in corporate loans increased by a gigantic 150 percent from January to April alone. And it has risen worldwide to a level that the globe last saw in the post-war 1950. Borrowing the companies in need for their reconstruction work in Corona is basically not a bad idea. If you rely on the good debtors. So to those who will actually repay the money. How do you recognize them? The fact that they are not paying high interest rates. You don’t need them at all.

It is therefore important to emphasize once again that high yield bonds are the only reason they generate such high interest rates because they also have an extraordinarily high risk. It’s no coincidence that such papers are called “scrap bonds” in the colloquial language of financial professionals. And it is precisely in such scrap paper that investors are now looking for more security in this crisis. At least you can be surprised about that. Mainly because the buyers were really big private investors. Why didn’t they prefer to put new equity funds in the custody account? Would you like to ask them.

Now, of course, there were many who felt confirmed in March that stocks are a risky investment. The rapid market crash apparently showed it by dropping the prices by up to 40 percent within a few days. But everyone who thinks that should remember the following: Since then, the major stock indices have grown full again, the leading German index Dax for example 37 percent. So if you were 100% invested in shares (which good asset managers would never advise a client to do, of course, because of risk diversification, but assuming you were one of these high-risk investors …), the portfolio would currently show a dip of 14 percent. That is little. The depot would be roughly back to October 2019. Does that sound so dramatic? But probably not.

However, if the money was pulled out of the market in panic in March and instead put it in bond funds, then at least you have missed this stock boom. But not only that.

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