Corporate bonds: the market’s middle ground

00:00:00: Corporate bonds.

00:00:01: They're not flashy enough to steal the spotlight like stocks, but they are not safe enough either.

00:00:09: They actually sit right in the middle.

00:00:11: When market shifts, when inflation buys and growth slows, volatility creeps into this middle ground can suddenly become very interesting for investors.

00:00:20: So today we are breaking it down.

00:00:23: what corporate bonds or how they differ from sovereign bonds How compared to stocks And more importantly how you can invest them.

00:00:31: But before we do as always please keep that opinion.

00:00:36: on my own This is not financial advice.

00:00:44: This show is brought to you by SwissQuote.

00:00:46: So recently I have been asked to dive into corporate bonds as the next educational video.

00:00:51: so let's dive straight in!

00:00:54: In short, a corporate bond is just alone.

00:00:56: You'll lend money to your company and in return the company promises two things To pay you interest what we call the coupon And to repay your initial investment at maturity.

00:01:06: As a Corporate Bond Holder... ...you have no ownership No vouching rights & NO PARTICIPATION.

00:01:11: EXPLOSIVE UPSIDE.

00:01:12: YOU HAVE JUST A CONTRACT AND THAT LEASES TO A KEY IDEA.

00:01:16: With bonds.. ..you're not betting on success of a company But you are betting on survival.

00:01:21: As long as the company doesn't default, you get paid.

00:01:25: Now zooming out there are two main types of bonds investors think about.

00:01:28: Sovereign bonds and corporate bonds Remember sovereign bonds are issued by governments.

00:01:33: Think a few US Treasuries or German Buns for example.

00:01:36: They're generally considered to safest assets in financial markets especially in developed economies because governments of the developed world can tax and in many cases, print money to pay investors back.

00:01:49: Corporate bonds on the other hand are issued by companies And companies don't have that same safety net.

00:01:54: They depend on revenues they depend on margins and their access to financing.

00:01:59: They cannot print money.

00:02:00: They cannot tax people to pay you back.

00:02:03: So naturally day carry more risk.

00:02:05: if things go wrong Well, they could default any financial markets.

00:02:09: more risk means one thing more yield and that extra compensation investors demand.

00:02:14: to hold corporate bonds instead of government bonds is called the credit spreads.

00:02:19: The higher risk, the higher this spread.

00:02:22: in times of crisis.

00:02:23: The riskier bonds credit spreads actually tend to make bigger moves.

00:02:27: as such the credit spread is one of the clearest signals off market sentiment for investors.

00:02:32: when spreads are tight confidence is high And when spreads widen fear is creeping.

00:02:38: At this point, you're probably asking why buy a corporate bond instead of stock right?

00:02:42: That's because at first glance stocks seem more attractive.

00:02:45: They offer growth upside and potential for stronger returns but they also come with full exposure to.

00:02:51: the downside when You buy is talk your own part of the company.

00:02:55: if it thrives you benefit But even struggles you take two hits.

00:02:59: on the worst case scenario shareholders are lost in line of repayment.

00:03:04: This is where it's interesting for bondholders because they, on the other hand, confers if there is a repayment.

00:03:10: If a company defaults They are the first actually to get their money back.

00:03:14: Equity holders are all in the country.

00:03:17: last position And that's the key distinction between owning equity and owning a bond.

00:03:22: With stocks your upside is unlimited But so is your volatility.

00:03:26: with bonds On the otherhand the upside is limited but you have less risk.

00:03:30: There is something many people overlook Corporate bonds don't just sit there until their maturity.

00:03:35: They actually trade every day on what's called the secondary market, that means once a bond is issued you can buy it and sell before it matures like with stock or take the hit to make some benefit out of it.

00:03:50: And this where things get more interesting because bond prices move.

00:03:54: If interest rates rise, for example existing bonds with lower capons become less attractive to investors.

00:04:01: So their prices tend to fall and if rates fall all those same bonds becomes more valuable so their price rises.

00:04:10: And beyond race credit risk matters too.

00:04:13: If investors become worried about a company's health, the bond price drops and same way if confidence improves to price recovers.

00:04:21: so even though bonds are often seen as boring fixed income well their prices or anything but fix or boring you can actually sell your bonds with again Again As I said But because that amount debt will be repaid at maturity is fixed called value cannot go very Very high limiting the upside potential when you're holding bonds.

00:04:42: So in summary, to trade off is quite simple.

00:04:45: stocks are about growth, bonds or about protection?

00:04:48: When do corporate bonds actually become interesting to hold?

00:04:52: first If you can log in a five, six even seven percent yield from solid US companies for example.

00:04:59: Well that becomes quite compelling especially compared to low-yield environments.

00:05:05: second when recession fears are rising but not realized just yet this is often the sweet spot because markets price and risk spreads widen yields increase But defaults haven't materialized us yet.

00:05:18: And third one equity valuations feel stretch.

00:05:20: hmm If stocks look expensive, corporate bonds can actually offer a more balanced way to stay invested earning income without fully taking the equity risk.

00:05:31: And finally it is interesting to hold corporate bonds when you want income over volatility.

00:05:36: Now how does A behave compared to stocks?

00:05:38: In strong economic expansion, stocks tend to outperform bonds.

00:05:42: Corporate bonds participate yes but they have a limited upside.

00:05:46: in periods of slowdown however bonds especially higher quality ones can hold up better supported by income when real crisis.

00:05:55: actually both can fall together leaving the typical sixty forty four year holders for example looking desperately.

00:06:03: And this is where the distinction between the high and low yielding bonds matter.

00:06:06: Investment grade bonds

00:06:08: are more

00:06:08: defensive, they do better in times of crisis whereas higher yield bonds behave much more like equities.

00:06:14: So if you think all bonds are safe well thank again Because a company with ample stable revenue and ample cash flow will pay less return sure but it's also help to get a better sleep through volatile periods.

00:06:27: while High Yielding Corporate Bonds Will give You More Return But They Are going to be at jeopardy when things become hectic.

00:06:35: Now, all this is good but how do you actually invest in corporate bonds?

00:06:39: Well there are a few ways to do so!

00:06:40: You can first buy individual bonds through your broker and as context-you choose a specific company.

00:06:45: ,you may chose a specific currency if available.

00:06:48: .You choose the maturity and yield.

00:06:50: If you hold the bond to maturity you get your principal back assuming no default.

00:06:54: of course As I said before... you sell the bond before maturity & gets reimbursed at the market price that could be below or above par.

00:07:01: But this market isn't always very accessible.

00:07:04: Minimum sizes can be large, pricing is an always transparent and liquidity can vary as well because the bonds are traded over-the-counter.

00:07:12: So more commonly investors go through funds or ETFs.

00:07:16: These instruments give you exposure to a basket of corporate bonds diversified across companies Diversified across maturities And much easier to buy and sell Aswell Because You Can Simply Trade Them Just Like Socks With Daily Liquidity And that's why you can also have a diversified portfolio of corporate bonds.

00:07:34: So zooming out, Portfolio Diversification by Building Exposure to Bonds is very common!

00:07:40: When we speak about sixty-forty portfolios the forty percent of the bond exposure could actually include sovereign and corporate bonds.

00:07:48: Again it's important.

00:07:49: remember they are not risk free but interesting hybrid asset for investors willing to smoothen out volatility while getting periodic returns or when markets feel stretched, when uncertainty builds.

00:08:02: When the outlook becomes less clear ask yourself am I being paid enough to take equity risk?

00:08:07: Or is this a moment to lean into credit?

00:08:10: because sometimes.

00:08:14: So this is all for today's episode on Corporate Bonds.

00:08:17: I'm Ipeko Skardishkaya and thank you for joining me, Thank You For All Your Beautiful And Supportive Comments!

00:08:41: Telegram and Blue Sky for regular market updates, visit our blog for articles that we publish there on a regular basis.

00:08:48: So I will meet you very soon!

00:08:50: And until

00:08:56: then... Goodbye!