THIS IS AN ADVERTISING FEATURE
Rhys Davies
Fund Manager, Invesco
My job as manager of Invesco Bond Income Plus Ltd (BIPS) is to supply income to enable the investment trust’s board to pay dividends to shareholders.
The income comes from a portfolio of bonds. If we think of the portfolio as the income engine, then higher coupons¹ and higher yields over the past two years have allowed us to refuel.
A lot has changed since 2022. It has become much easier to earn yield from bonds without taking too much risk. For a long time, it wasn’t like that. For several years before 2022, ultra-low interest rates enabled bond issuers to finance very cheaply, with historically low coupons. It was a challenge to keep a good level of fuel in the tank!
In European high yield² coupons on newly issued bonds fell to just 3.7% in 2021. In contingent capital bonds³, another important market for investors seeking higher income, coupons fell to an average 4.6%. The yield to maturity4 of these markets fell too.
Figure 1. European high yield and contingent capital indices – 2018 to 2023
|
European High Yield Index2 |
Contingent Capital Index³ |
|||
|
Average coupon of new issue |
Yield to maturity of index |
Average coupon of new issues |
Yield to maturity of index |
|
|
Issue year |
% |
% |
% |
% |
|
2018 |
3.75 |
5.18 |
5.77 |
6.83 |
|
2019 |
3.56 |
3.61 |
6.13 |
5.58 |
|
2020 |
3.76 |
3.34 |
5.24 |
4.76 |
|
2021 |
3.69 |
3.43 |
4.58 |
5.13 |
|
2022 |
6.44 |
8.00 |
7.43 |
8.60 |
|
2023 |
7.55 |
6.80 |
8.80 |
7.97 |
Source: ICE BoAML as at 31 December 2023
This changed in 2022. Higher interest rates meant that the high yield bond market had to adjust to remain competitive with government bonds and cash deposit accounts. The price of existing bonds (including all those ones that had been issued with low coupons) fell below issue price (‘par’), to a point where their total yield to maturity was acceptable to investors.
Figure 2. ICE BoAML European Currency High Yield Index - yield to maturity (%)
Source: ICE BoAML as at 22 February 2024
As new bonds have come to the market, coupons have had to rise too (see table above). So far, issuance of corporate high yield bonds has been relatively low. As the table below shows, the supply of new bonds has fallen substantially since 2021.
Figure 3. High yield bonds supply (European currencies) Little issuance in 2022 & 2023
Source: JP Morgan European High Yield Quarterly Review, 8 January 2024 Bonds rated BB, B, CCC and NR are non-investment grade and categorised as ‘high yield’. Credit or default risk is the primary risk for high yield bonds. For this reason, thorough credit analysis is an important part of an active manager’s process when investing in these securities.
But there has been issuance, in high yield bonds and in subordinated bonds and senior investment grade bonds. Yields and coupons have risen in all these markets and we have been very happy to take many of the opportunities on offer. In some cases, we have been able to buy investment grade bonds with higher coupons than prevailed in the high yield market just a couple of years ago.
As a result, the level of income produced by the BIPS portfolio has risen. At the end of 2021, the weighted average coupon5 of the portfolio was 6.1%; By the end of 2022 it was 6.5% and it is now (December 2023) 7.0%6. The yield to maturity, which accounts for future capital returns as well as income, is even higher.
Pleasingly, this increase has occurred even as the overall credit quality of the portfolio has improved (see below). We have added investment grade bonds along with high yield bonds. The common theme is of companies whose creditworthiness we trust, having to pay us more in coupon than they did before. This is a much better situation for bond investors.
Figure 4. Invesco Bond Income Plus Portfolio credit breakdown
Source: Invesco as at 31 December 2023
I believe that the bonds we are adding now can contribute a valuable level of income and total return for the portfolio. I also expect to have more opportunities like this as companies re-finance in a higher rate environment, which should support the board in its quest to deliver dividends7.
Footnotes
¹ A coupon is the amount the borrower will pay each year as a reward to the lender until the bond matures and the debt is repaid.
² ICE BofA European Currency High Yield Index
³ Contingent convertible capital (CoCos) are debt instruments that allow the write down or conversion of the bond into equity in certain, defined circumstances. ICE BofA Contingent Capital Index
4 Yield to maturity is the total return that will be paid out by a bond's expiration date.
5 The weighted average coupon rate is determined by multiplying the coupon rate of each bond based on its size within the portfolio.
6 The yield shown is expressed as a % per annum of the current NAV of the fund. It is an estimate for the next 12 months, assuming that the fund’s portfolio remains unchanged and there are no defaults or deferrals of coupon payments or capital repayments. The yield is not guaranteed. Nor does it reflect any charges. Investors may be subject to tax on distributions.
7 Dividend payments are determined by the Board and are not guaranteed.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Invesco Bond Income Plus Limited has a significant proportion of high-yielding bonds, which are of lower credit quality and may result in large fluctuations in the NAV of the product.
Invesco Bond Income Plus Limited may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events.
The use of borrowings may increase the volatility of the NAV and may reduce returns when asset values fall.
Invesco Bond Income Plus Limited uses derivatives for efficient portfolio management which may result in increased volatility in the NAV.
Important information
All information correct as at 20 February 2024 unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
If investors are unsure if this product is suitable for them, they should seek advice from a financial adviser.
Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns.
The yield shown is expressed as a % per annum of the current NAV of the fund. It is an estimate for the next 12 months, assuming that the fund’s portfolio remains unchanged and there are no defaults or deferrals of coupon payments or capital repayments. The yield is not guaranteed. Nor does it reflect any charges. Investors may be subject to tax on distributions.
Views and opinions are based on current market conditions and are subject to change.
For more information on our products, please refer to the relevant Key Information Document (KID), Alternative Investment Fund Managers Directive document (AIFMD), and the latest Annual or Half-Yearly Financial Reports. This information is available on the website: https://www.invesco.com/uk/en/investment-trusts/invesco-bond-income-plus-limited.html.
Further details of the Company’s Investment Policy and Risk and Investment Limits can be found in the Report of the Directors contained within the Company’s Annual Financial Report.
Invesco Bond Income Plus Limited is regulated by the Jersey Financial Services Commission.
Issued by Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
EMEA 3451803
