How the economy impact bonds?
Investment grade bonds are usually favoured when economic conditions are deteriorating. However, under buoyant conditions, demand for high yield bonds increases. Amid stronger global growth, higher yielding bonds have generally outperformed lower yielding ones.
Interest rates and their effect on a bond’s rating
Duration, which is often measured in years, is calculated by time weighting the bond investor’s expected income (or coupon) and maturity (or principal) payments. Bonds with higher durations are more sensitive to actual, or expected, changes in interest rates than bonds with lower durations.
Investment grade bonds usually have higher durations, because proportionately more of their total income stream is received via the repayment of principal at maturity. The most attractive investment grade bonds are similar to high quality government bonds (which also tend to have above average durations).
With high yield bonds, proportionately more of the payments are received by way of coupons, and their maturities are typically shorter. Therefore, when interest rates rise or are expected to, they tend to be less affected than investment grade bonds. However, when interest rates fall or are expected to, the prices of high yield bonds are likely to rise by less than prices of investment grade bonds.
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