What are bonds and how do bond funds function?
What are bonds?
If a debtor (e.g. a state or a company) needs money, they can borrow it from a bank – or they can issue a bond. Investors buy this bond and thus ‘lend’ the money to the debtor. The conditions for how this is done are precisely regulated for each bond. This concerns both the duration of the bond and the frequency and amount of interest payments to the creditor.
FAQ
Why are corporate bonds a popular form of investment?
Corporate bonds, in particular ones with (very) good ratings, have always been a popular form of investment. The expected return on the bond depends on the creditworthiness of the issuer, because the weaker the creditworthiness, the higher the yield on the corporate bond. Credit ratings by rating agencies help to measure a company’s creditworthiness, and thus also estimate the risk associated with a bond. For example, a rating of AAA denotes the best creditworthiness.
What makes high yield bonds so special?
High yield bonds are bonds issued by companies with lower credit ratings (BB and lower). These bonds normally offer much higher returns than instruments from issuers with strong ratings. This is exactly what makes them so popular for investments – even though the yield advantage is also accompanied by higher risks.
Why Emerging Market bonds?
Emerging Market bonds are bonds issued by companies from the Emerging Markets. These bonds are issued either in the local currency of the country in question or in EUR or USD. These “hard currency bonds” offer yield advantages compared to government bonds issued by euro area core countries or the USA. Local currency bonds feature additional potential as a result of possible currency appreciation (which can also be a disadvantage in the event that the local currency weakens).
Returns – in a nutshell
The return is the amount earned on an investment, expressed in percent, for a full year and pertains to the capital invested. The return is an important measure for the performance and comparison of capital investments. It can refer to the interest income on a savings account, the current yield on interest-bearing securities, or the dividend payments on equities. The return on an investment expected in the future can deviate from the return that is actually generated.
Duration: was ist das?
Duration refers to the average capital commitment period of a bond. It denotes the average period of time it takes for the investor to recover the invested capital. The longer the remaining term of the bond, the longer the duration is. However, the duration is generally shorter than the remaining term, as the coupon payments which fall due on the capital during the term reduce the amortisation period. The higher, earlier and more frequent the coupon payments, the more the duration decreases.
What is modified duration?
Modified duration expresses the percentage change in the value of a bond when the market yield changes. It shows the percentage increase in the bond price if the market yield falls by 1% or the percentage decrease in the price if the market yield rises by 1%. The higher the modified duration, the larger the price loss in the case of rising interest rates and the price increase in the case of falling interest rates.
Bond market outlook
Corporate bonds and emerging market bonds remain favoured
The further slight decline in key interest rate expectations has also pushed bond yields further down (and prices up). The bond market is currently pricing the yields of ten-year German government bonds at around two percent (just above the expected key interest rate low of 1.75%), which is understandable as long as the inflation and economic outlook remains subdued. Significantly lower yield levels would require even lower key interest rate expectations – and for that, an economic downturn or at least the fear of one would be necessary. There is somewhat more room for declining bond yields in the US (ten-year yields at 3.7% vs. expected key interest rate low of 3%).
However, we currently expect positive economic growth (‘soft landing’) with interest rates falling at the same time, which should continue to favour spread products (a very successful strategy so far this year). We therefore continue to overweight corporate bonds (Euro investment grade), Italian and French government bonds within the Euro government bond segment, and Emerging Market bonds in hard currencies (US dollars versus US government bonds).
Find here more information on current market developments!
As of October 2024
Bond markets in detail
A good time to enter the high yield bond market?
High yield bonds (i.e. bonds from issuers with lower ratings, thus making them riskier) have been a sought-after investment instrument for a long time. Last year, they were among the best performers on the bond markets. Are they still worth investing in?
Are the prospects still rosy for corporate bonds?
Bonds had an unexpectedly difficult year in 2023, but investors were nevertheless treated to decent returns thanks to a strong finish. This year, the bond markets are already experiencing new headwinds. Will they last? And how will corporate bonds fare?
Investing in Emerging Market bonds (now)?
Emerging Market bonds generally offer higher yields than bonds from developed industrialised countries, not least due to their above-average growth and the increasing global economic importance of many Emerging Markets. Nevertheless, the associated risks should not be ignored.
Bond markets remain exciting – nothing happens without ESG anymore
On 13 April 2023, at a Raiffeisen Capital Management press conference, Georg Nitzlader, head of the Fixed Income Team, discussed current trends on the bond markets and highlighted the increasing importance of ESG for these markets as well.
Bond funds
Bond management is one of Raiffeisen Capital Management's longest established core competencies.
Invest in bonds - globally and sustainably!
Our bond fund Raiffeisen-ESG-Global-Rent invests worldwide in accordance with ESG criteria and uses an innovative concept developed in-house to assess the sustainability of countries. It is an excellent instrument for global diversification of bond investments.
Invest in short-dated dollar bonds now?
In recent years, the US dollar has gradually appreciated against the euro with comparatively minor fluctuations. This has meant positive returns from exchange rate gains for euro-based investors. Is this dollar strength now coming to an end or is now still a good time to enter the market?
Promote the ESG improvement of the EM bond markets
The Emerging Markets present a number of major challenges for investors when it comes to sustainability and ESG-criteria. However, understanding and overcoming these challenges also opens up significant opportunities, both in terms of earnings and promoting a transition to sustainable business practices in the Emerging Markets.
Euro bond fund: invest flexible and earnings-oriented
At the start of year, the course of the bond markets in Europe appeared to be mapped out: The central banks’ key rates and yields would decline and bond prices would increase. The picture has become much less clear in the meantime. But this does not necessarily have to be an obstacle to investing in bonds at the moment. However, a high level of flexibility, a good strategy, and a strong focus on the risks will be important for the foreseeable future. All of these attributes are offered by Raiffeisen-ESG-Euro-Rendite.
Raiffeisen-Nachhaltigkeit-Rent: No need to fear the interest rate turnaround
It has frequently been a topic of discussion for quite some time now, sometimes as a source of hope and sometimes as a cause for concern: the “interest rate lift-off”. Now it is finally here and has resulted in hefty price fluctuations and yield movements. Raiffeisen-Nachhaltigkeit-Rent seeks out and takes advantage of opportunities in precisely such turbulent phases on the bond markets.
Eastern European Bonds: participate in economic acceleration
Bonds and currencies in Central and Eastern Europe were hit very hard in 2022, but then rebounded significantly over the past year. How is the outlook for the region shaping up for 2024?
Well equipped with short-term bonds in the current environment
Following an extremely difficult year for bonds in 2022, 2023 brought distinctly positive returns again for investors. But 2023 has also turned out to be quite challenging, especially for long-dated bonds. For many observers, the path for 2024 appears to be mapped out already: interest rate cuts and further declines in yields (i.e. rising bond prices). But are things really so clear-cut?
Invest sustainably in euro bonds with Raiffeisen-ESG-Euro-Rent
Since mid-November one of our oldest bond funds, Raiffeisen-Euro-Rent, has started investing sustainably on the basis of ESG (environmental, social, governance) criteria, with a stronger focus on key Future Transformation Topics. As part of this transition, the fund name has also changed, and it is now known as Raiffeisen-ESG-Euro-Rent.
The investment strategy permits the Raiffeisen-Nachhaltigkeit-Rent and the Raiffeisen-ESG-Euro-Rendite to predominantly (relative to the associated risk) invest in derivatives.
The Fund Regulations of Raiffeisen-ESG-Euro-Rendite, Raiffeisen-Inflationsschutz-Anleihen, Raiffeisen-Nachhaltigkeit-Rent, and Raiffeisen-ESG-Global-Rent have been approved by the FMA. The Raiffeisen-Inflationsschutz-Anleihen may invest more than 35% of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Belgium, Finland, Germany. The Raiffeisen-Nachhaltigkeit-Rent may invest more than 35% of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Italy, United Kingdom, Sweden, Switzerland, Spain, Belgium, United States, Canada, Japan, Australia, Finland, Germany. The Raiffeisen-ESG-Global-Rent may invest more than 35% of the fund's volume in securities/money market instruments of the following issuers: United States, Japan, Germany, France, United Kingdom. The Raiffeisen ESG Euro Rendite may invest more than 35 % of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Belgium, Finland, Germany.
As part of its investment strategy for Raiffeisen-Mehrwert-ESG 2028 II and Raiffeisen-Mehrwert-ESG 2029, six months or less prior to the end of the fund’s term, the management company may mainly invest in sight deposits.
The following assessments of capital market prospects are a snapshot and may change at any time without notice or update. They represent a basic orientation framework and do not represent a generally binding view for fund and portfolio management. They also represent neither a binding forecast nor a recommendation for action for investors. The assessments of individual teams or fund managers may deviate significantly from this under certain circumstances. Similarly, the positioning of the investment funds, asset management products and portfolios may differ significantly from the market outlook mentioned on this page, for example due to different investment horizons, strategies and models used or discretionary decisions made by individual fund managers.
As of November 2024