Märkte Insight: Bringen schwache Schuldner auch künftig Extra-Renditen für Junkbond-Fonds?

Markets Insight: Will Weak Borrowers Still Deliver Extra Returns for Junk Bond Funds?

Bond yields have significantly increased on the debt market, drawing the focus back to interest-bearing papers. High-yield bonds, with their comparatively high returns, appeal to investors, especially riskier papers from companies with weaker credit ratings. For fund managers holding such junk bonds, a return booster was provided by particularly weak borrowers in recent years.

Funds with a higher proportion of these low-rated bonds tended to perform particularly well, according to a recent analysis by Morningstar, a US research house. However, this strategy may now be reaching its limits. The returns for European high-yield bonds have risen sharply recently, in the context of rising capital market interest rates.

Union Investment, a European fund manager, last year found that these papers delivered a current annualized yield of nearly seven percent – double the rate at the end of 2021. US asset manager BlackRock currently considers European high-yield bonds attractive. Junk bonds include securities of companies rated "BB" and worse, with borrower credit ratings that vary widely on the market.

Today, the risk of highly speculative papers is driving higher yields in the junk bond fund Morningstar evaluated how investing in bonds with the weakest credit rating, such as CCC and below, impacted fund returns over the past years. They analyzed 200 European high-yield bond funds from early 2017 to mid-2026. The result: The higher the share of such high-risk bonds in the portfolio, the higher the return tended to be.

Funds with a maximum of 2% CCC allocation achieved a total return of almost 24% over the period, rising to nearly 28% with a 2-4% allocation, 32% with 4-6%, and 36% with 6-8%. Morningstar analyst Jeana Marie Doubell concluded that a moderate exposure to CCC-rated bonds and occasional defaults could be part of a successful high-yield strategy.

However, the positive effect of higher credit risk is now reaching its limits. Funds with a CCC allocation above 8% achieved only a total return of nearly 31%. Higher exposure to weak borrowers did not always mean higher returns. Morningstar's analysis also notes that the economic environment overall was favorable during the study period, benefiting riskier strategies.

When the COVID-19 pandemic began in March 2020, funds with a high proportion of CCC bonds fell sharply in the short term. Today, companies with weak credit ratings are particularly under pressure in the European bond market. The risk premium investors demand for European bonds with a CCC rating is the highest it has been since 2009, according to Bloomberg financial data service.

Rising capital market interest rates increase financing costs for companies, which could particularly affect weak borrowers. Whether the risk strategy for high-yield bonds will also work in the coming months is therefore questionable.