As investors seek higher returns following a long period of very low rates, issuers are taking advantage by issuing longer-term debt for lower-rated securities, notably in the BBB sector. In this video, Portfolio Managers Nick Maroutsos, Dan Siluk and Jason England discuss the risks presented by a large influx of BBB-rated securities. Questions covered include:
Are investors compensated for BBB risk?
Are there any recessionary signals?
How might BBB react in a risk-off environment?
Bond ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest).
2's and 10's spread is the difference in yield between 2-year Treasuries and 10-year Treasuries.
Basis point (bp) equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.
Recorded November 2018
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
Callable debt securities, such as some asset-backed or mortgage-backed securities (ABS/MBS), give issuers the right to repay capital before the maturity date or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the fund may be impacted.
The Fund may use derivatives towards the aim of achieving its investment objective. This can result in 'leverage', which can magnify an investment outcome and gains or losses to the Fund may be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
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When the Fund, or a currency hedged share class of the Fund (with ‘Hedged’ in its name), seeks to mitigate (hedge) exchange rate movements of a currency relative to the Fund’s base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.