Investors looking to buy low may find bond prices much more appealing after a terrible first half of the year for fixed-income markets, the worst on record, posits an article in Barron’s. 10-year Treasury yields have doubled since the beginning of 2022, rising to over 3%, and since bond prices move in the opposite direction as their yields, corporate bond prices have plummeted.
The result has been twofold: high-yield bonds are now generating much higher income, more than 8% on average, and the steep drop in prices could spur those that issue the debts to actually start buying the bonds themselves. In a recent note from Bank of America that is cited in the article, strategists wrote that with an estimated $300 billion of corporate bonds trading at 75% of their face value or below, buybacks could skyrocket. That’s especially true since many of the corporate bonds now trading at a discount include such household names as Apple, Amazon, Verizon, and Microsoft. These companies could seize the rare opportunity to generate high returns from buying back their own debt at a lower price.
2022’s sell-off in speculative-grade bonds has caused yields to rise to 8.4%; total returns after 12 months on yields between 8% and 9% have been strong in the past, ranging between 7% and 17%. And a higher starting yield can shield investors from defaults that arise down the line; according to calculations by Rachna Ramachandran of GMO, an 8.4% yield can offset a 12% default rate, and yields would need to climb another 1.95% before an investor starts to drown. So along with higher income, bonds can offer a safety hedge, the article contends.
While fixed-income investors got battered last year by bad prices generated by historically low bond yields, things are looking up this year as higher yields produce lower prices and add up to a much safer bet.