Emea Fixed Income Indexes
FTSE Russell offers a range of indexes that measure the performance of European, Middle Eastern and African fixed income securities including government, government-sponsored, collateralized, and corporatedebt. Broadly-focused indexes that span the entire EMEA region and measure both investment-grade andhigh-yield bonds are available, as are indexes more narrowly focused on specific countries and/or sectors.
Investment Grade Credit Rating Details
Investment grade issuer credit ratings are those rated above BBB- or Baa. The exact ratings depend on the credit rating agency. For Standard & Poor’s, investment grade credit ratings include:
Companies with any credit rating in this category boast a high capacity to repay their loans however, those awarded a AAA rating stand at the top of the heap and are deemed to have the highest capacity of all to repay loans.
The next category down includes the following ratings:
Companies with these ratings are considered to be stable entities with robust capacities for repaying their financial commitments. However, such companies may encounter challenges during deteriorating economic conditions.
The bottom tier of investment grade credit ratings delivered by Standard and Poor’s include:
Companies with these ratings are widely considered to be “speculative grade” and are even more vulnerable to changing economic conditions than the prior group. Nevertheless, these companies largely demonstrate the ability to meet their debt payment obligations.
According to Moody’s, investment grade bonds comprise the following credit ratings:
The highest-rated Aaa bonds possess the least of a company’s potential failure to repay loans. By contrast, the mid-tier Baa-rated companies may still have speculative elements, presenting high credit riskespecially those companies that paid debt with expected future cash flows that failed to materialize as projected.
What Is Redemption Yield
Until now, this article has focused on income yield. However, redemption yield is actually a more accurate measure of yield which takes into account the fact that a capital/gain loss is likely to be made where the bond has not been purchased at par value. Given the majority of bond investments are made via the secondary market, it is far more common for a bond to be purchased at a price above or below par, than at par value itself.
Redemption yield may also be referred to as yield to maturity or book yield.
| Current price vs. par | |
|---|---|
| Bond price less than par value | Redemption yield higher than income yield |
| Bond price more than par value | Redemption yield lower than income yield |
Where the current price of a bond is lower than the par value of the bond, the redemption yield percentage will be higher than the income yield.
Conversely, where the current price of a bond exceeds the par value of the bond, the redemption yield percentage will be lower than the income yield.
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What Is A Fixed
A fixed-income security is an investment that provides a return in the form of fixed periodic interest payments and the eventual return of principal at maturity. Unlike variable-income securities, where payments change based on some underlying measuresuch as short-term interest ratesthe payments of a fixed-income security are known in advance.
Fixed Income Securities Benefits
A portfolio primarily consisting of fixed income securities is beneficial in a number of ways, including:
1. Diversification
Building a portfolio essentially with fixed income securities brings diversification to the table. Diversification is a high priority characteristic that one needs to keep in mind when building their portfolio. It is especially true when the market is highly volatile and uncertain, with prices going up and down drastically.
Diversification helps bring resilience to the investment portfolio against such volatility and price corrections. It creates a sense of balance wherein if one section of the portfolio suffers, the portfolio is diverse enough to cover up the slack by having another section of high-performing securities.
2. Fixed income
The term fixed income securities provides some insight into why a portfolio that consists mainly of fixed income securities is preferred. Fixed income securities not only pay dividends and provide good returns but also offer a steady stream of income.
3. Risk level
Compared to equities, fixed income securities generally come with relatively lower exposure to risk. For the most part, it involves default risk, which is when the issuer of bonds is not able to meet their financial obligations.
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Two Factors For Finding Yield
There are two traits to look for in the bond market for finding the highest yield: term length and risk. Long-term bonds tend to offer higher yields than short-term bonds. This is because more can go wrong in ten, twenty, or thirty years than in the shorter time span of short-term bonds, and so long-term investors want higher payment for the extra risk they take.
Investing In Individual Gilts / Corporate Bonds
Platforms such as Hargreaves Lansdown and Fidelity offer private investors the ability to invest in individual gilts and corporate bonds on the secondary market. However, unlike share purchases, individual gilt and corporate bond investments typically feature a minimum investment of £1,000.
This minimum investment value means that smaller investors would typically be better served choosing to invest via a bond investment fund or ETF in order to diversify their holdings and reduce the risk of one bankruptcy having a material impact on total portfolio value.
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Which Securities Are Considered Investment Grade
In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they have a low risk of default. Investment grade is determined based on a relative scale by credit rating agencies such as Standard & Poor’s and Moody’s. Such credit ratings express the ability and willingness of a borrowing organization to repay its debt and are based on many financial and economic indicators that influence the borrower’s creditworthiness. Securities with a rating of BBB or above from Standard and Poor’s or Baa3 or above from Moody’s are considered investment grade.
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Changing Bond Prices A Worked Example
Imagine a 20-year 5% corporate bond priced at £100. In 20 years time, this bond will redeem at £100. However, between then and now, the price will shift due to a mix of micro and macro economic factors as outlined above.
| Price |
|---|
| Yield below coupon rate |
Impact of changing interest rates on bond prices
If interest rates increased to 9%, investors could put £100 in the bank to generate £9 annual interest. Since saving that £100 in a bank is less risky than owning a bond, the price of our £100 bond would need to decrease to entice investors to purchase. The bond would need to fall to £55.55 just to provide an equivalent income yield . The price would then be below the par value, but the income yield would be above the coupon rate.
Impact of changes in deemed risk on bond prices
If the business issuing the corporate bond reports a fantastic set of results, resulting in an improved credit rating from Moodys, investors may decide that a yield of 4.7% is sufficient to reflect the risk of holding the bond. The price of the bond could now rise to £106.38 . The price would then be above the par value, but the income yield would be below the coupon rate.
Conversely, if the business posts a poor set of results, resulting in a downgrade in rating from Moodys, investors may decide a yield of 8.0% would be commensurate to the level of increased risk. The price of the bond would have to decrease to £62.50 .
Ridgewood Canadian Investment Grade Bond Fund Announces Estimated Distribution Rate For Third Quarter
TSX Symbol: RIB.UN
TORONTO, June 30, 2022 /CNW/ Ridgewood Canadian Investment Grade Bond Fund is pleased to announce the estimated distributions of the Fund for the third quarter of 2022 as follows:
|
Estimated Payable Date |
Estimated Distribution Amount per Unit |
|
$0.0530 |
This distribution rate equates to an annualized distribution rate of 5.30% on an initial subscription price of $12.00 per unit. Details of each distribution, including the record and payment date, will be confirmed at the time of the declaration of the distribution.
About Ridgewood Canadian Investment Grade Bond Fund:
The Fund will seek to achieve the following investment objectives: to provide unitholders with monthly cash distributions targeted to be 5.3% per annum on the original issue price of $12.00 per unit and to maximize total returns for unitholders while preserving capital in the long term.
About Ridgewood Capital Asset Management Inc.:
Ridgewood is an independent investment manager that manages approximately $1.4 billion in assets for a diversified client base of high net worth individuals, foundations/endowments, First Nation mandates and institutional accounts, of which approximately $1.05 billion is invested in fixed income assets.
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Get Broad Exposure To The Bond Markets
You can use just a few funds to complete the bond portion of your portfolio. Each of these ETFs and index funds gives you access to a wide variety of bonds in a single, diversified fund.
- View the Vanguard Total International Bond Index Fund, which holds about 6,427 non-U.S. bonds.
For more information about Vanguard funds and ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus read and consider it carefully before investing.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services or through another broker . See the Vanguard Brokerage Services commission and fee schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
Us Investment Grade Corporate Strategy
| Pooled Vehicle |
The Investment Grade Corporate Strategy is a value-oriented fixed income strategy that seeks attractive total returns from income and price appreciation by investing in a diversified portfolio of debt issued by corporations and other non-government issuers. To help achieve this objective, the strategy combines a top-down macroeconomic assessment, to determine optimal beta positioning for the portfolio, with rigorous bottom-up fundamental analysis.
The team believes that market participants may often under or overvalue a companys default risk, resulting in bond prices that fail to reflect the true credit profile of a company. However, the team believes that the market, over time, will re-value the bond prices of high-quality issuers based on an improving credit profile, thereby offering investors in undervalued, high-quality issuers, the opportunity to potentially exploit these pricing inefficiencies and earn superior returns over the long term.
The team believes that successful credit management depends on four factors:
- A value-driven process
- Broad diversification in an attempt to reduce portfolio risk
- A global approach
Effective July 31, 2022, Stella Ma was added as portfolio manager on the Strategy.
RISK CONSIDERATIONS
Diversification does not protect you against a loss in a particular market however it allows you to spread that risk across various asset classes.
OTHER CONSIDERATIONS
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Schwab To Launch The Schwab Municipal Bond Etf
WESTLAKE, Texas—- Schwab Asset Management, the asset management arm of The Charles Schwab Corporation, today announced the launch of the Schwab Municipal Bond ETF . The first day of trading is expected to be on or about October 12.
With an expense ratio of 0.03%, the Schwab Municipal Bond ETF comes to market at a lower cost than comparable funds1. This ETF provides access to the broad U.S. investment grade, tax-exempt bond market with the additional benefit of potentially higher tax efficiency of its ETF structure. It can serve as part of the core of a diversified portfolio.
As bond yields have risen, fixed income investing is more attractive than it has been in years, making this an opportune moment to introduce a new choice for investors seeking a low-cost, straightforward approach to income, diversification and risk management in their portfolios, said John Sturiale, Head of Product Management and Innovation, Schwab Asset Management. With the launch of the Schwab Municipal Bond ETF, we at Schwab Asset Management are extending our legacy of low-cost leadership and expanding our well-established line-up of bond ETFs that can play an important role in a diversified portfolio.
For more information, review the prospectus here.
About Schwab Asset Management
About Charles Schwab
More information is available at www.aboutschwab.com. Follow us on , , and .
Disclosures:
Christine Hudacko
What Are The Potential Benefits Of Fixed Income
Depending on your financial goals, fixed income investments can offer many potential benefits, including:
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What Does It Mean
A fund’s Morningstar Rating is a quantitative assessment of a fund’s past performance that accounts for both risk and return, with funds earning between 1 and 5 stars. As always, this rating system is designed to be used as a first step in the fund evaluation process. A high rating alone is not sufficient basis upon which to make an investment decision.
S& p 500 Investment Grade Corporate Bond Index
The S& P 500® Investment Grade Corporate Bond Index, a subindex of the S& P 500 Bond Index, seeks to measure the performance of U.S. corporate debt issued by constituents in the S& P 500 with an investment-grade rating. The S& P 500 Bond Index is designed to be a corporate-bond counterpart to the S& P 500, which is widely regarded as the best single gauge of large-cap U.S. equities.
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What Are The Benefits Of Investing In Bonds
Bonds offer a host of advantages:
- Capital preservation: Capital preservation means protecting the absolute value of your investment via assets that promise return of principal. Because bonds typically carry less risk than stocks, these assets can be a good choice for investors with less time to recoup losses.
- Income generation: Bonds provide a fixed amount of income at regular intervals in the form of coupon payments.
- Diversification: Investing in a balance of stocks, bonds and other asset classes can help you build a portfolio that seeks returns but is resilient through all market environments. Stocks and bonds typically have an inverse relationship, meaning that when the stock market is down, bonds become more appealing.
- Risk management: Fixed income is broadly understood to carry lower risk than stocks. This is because fixed income assets are generally less sensitive to macroeconomic risks, such as economic downturns and geopolitical events.
- Invest in a community: Municipal bonds allow you to give back to a community. While these bonds may not provide the higher yield of a corporate bond, they often are used to help build a hospital or school or that can improve the standard of living for many people.
Relation To Bond Ratings
While not perfect, bond ratings have been a good predictor of default. Historically, there is a strong correlation between high bond ratings and low defaults, and vice versa. Default rates among corporate bond issues differ markedly based on credit rating.
According to S& P Globals 2018 Annual Global Corporate Default and Rating Transition Study, which tracked corporate bond performance over a period of more than 30 years, the highest one-year default rates for bonds rated AAA, AA, A, and BBB were 0%, 0.38%, 0.39%, and 1.02%, respectively. By contrast, the highest one-year default rate for bonds rated BB, B, and CCC/C were 4.22%, 13.84%, and 49.28%.
Because of the high risk of loss that investing in below investment-grade bonds entails, many institutional investors, such as bank trust departments, insurance companies and pension funds, are required to only invest in investment-grade bonds. However, many investors are willing to accept the risk of default for higher yields. Many mutual funds and exchange-traded funds invest in lower rated bonds, which spreads the risk among a large portfolio.
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