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.
What is duration?
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
Still positive on corporate and Emerging Market bonds
Although the performance of corporate and Emerging Market bonds (in hard currency) has already been excellent this year, we remain overweight in these segments. While risk premiums have understandably decreased significantly over the year, leading to positive price developments, these bonds still offer a significantly better performance with their current yield spread, even in a sideways market, compared to "risk-free" government bonds.
In an environment of weak but positive economic growth – with no recession expected for 2025 – and declining interest rates, spread products should continue to outperform.
In contrast, we remain underweight in very long-term (German) government bonds. Their yield levels are already very low again and sufficiently account for interest rate cuts, while the high price volatility of these bonds poses an additional risk. Within Eurozone government bonds, we remain overweight in Italian and French government bonds.
Find here more information on current market developments!
As of December 2024
Bond markets in detail
Are high-yield bonds still attractive?
High yield bonds (i.e. bonds from less creditworthy and therefore more risky issuers) have been a sought-after investment instrument for a long time. But, is it currently still worth investing in high-yield bonds?
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.
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?
Bond funds
Bond management is one of Raiffeisen Capital Management's longest established core competencies.
How a sustainable bond fund seeks opportunities in turbulent times
The bond markets have been characterised by strong fluctuations in yields and prices so far in 2024. Interest rate cuts (especially in the USA) have been priced in and out several times. The bond fund Raiffeisen-Nachhaltigkeit-Rent seeks out and successfully utilises opportunities, especially in such stormy, volatile phases on the bond markets.
Eastern European bonds: promising, despite uncertainties
Bonds from issuers in Central and Eastern Europe have delivered quite respectable returns for investors over the past twelve months. What does the outlook for 2025 look like?
Raiffeisen-ESG-Global-Rent: Invest sustainably across the world
Bond investments have enjoyed modest-to-good value growth since the turn of the year, thanks mainly to a significant renewed rise in interest income. But what might happen over the next twelve months, and what are our predictions for the global bond markets?
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.
The investment strategy permits the fund Raiffeisen-Nachhaltigkeit-Rent to predominantly (relative to the associated risk) invest in derivatives.
The Fund Regulations of the funds Raiffeisen-Osteuropa-Rent, Raiffeisen-ESG-Global-Rent and Raiffeisen-Nachhaltigkeit-Rent have been approved by the FMA. 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. Raiffeisen-Osteuropa-Rent may invest more than 35% of the fund's volume in securities/money market instruments of the following issuers: Poland, Türkiye, Hungary.
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 April 2024