High-Yield Bonds

[Wolfsheim]

Hi Mustachians,

for long-term investments I would recommend high-yield goverment bonds or bonds of goverment-backed institutions. I recommend these only because of their high yield, this is not for day-trading.

DE0003030516: State Bank of Baden-Wurtemberg, Germany. Still a long-running Deutsch-Mark bond, but very attractive yields. Also a prime rating, because these baks are practically owned by the German state.

XS0283199247: Bonds of Germany's Bank for Reconstruction.

I put some of these in my portfolio next to some more risky Icelandic bonds (GB0004556113) . I guess I will come close to a 7.5% overall return this year.

[matchewed]

But what is the long-term return on the bonds? Why would I choose that over equities or a mix of the two? Mind you I'm not from Europe and don't look to much into the particulars of investing from there, so I'm legitimately curious about my questions.

[Wolfsheim]

Since these are high-yield bonds, the long-term return before tax is above average. However, a higher risk has to factored in too
For those I have been talking about:

DE0003030516: State Bank of Baden-Wurtemberg. Dividend Coupon of 17,032% p.a.
GB0004556113: Iceland. Dividend Coupon of 14,500% p.a. but with a meagre Baa3 rating. Default Probability would be 0.7% p.a.

So if you hold the bond long-term you get the annual dividend. Of course there is also a market price which is floating freely on the bond market. The overall return on the bond is Market Price Gain/Loss + Dividend.

I plan to hold these bonds long-term because they yield ablove the historical return of average stocks. However I only build a small position to gain more experience with investing in this asset class. However these returns are pre-tax. For calculating your net profit:

Overall Bond Return - Tax (28% in Germany) - Inflation = Net Profit

So this is my kitchen math. Please comment if I am utterly wrong.

[pom]

The Bid Yield of DE0003030516 is only 5.53%, that is hardly above the average return for stocks.

Sure the coupons are €17.032 per year but the bonds are selling for €209 so coupon yield is 8.14% which is great but at redemption in 2026 you will only get €100 back so you lose €109 of principal over 13 years.

Plus there is always a risk that something really bad happens in the next 13 years and that you don't even get that €100 back. Unlikely but not impossible.

I don't have enough info on the Icelandic bond to discuss.

Right now, B rated bonds will yield about 6-7% and C rated bonds will yield around 10% (befor adjusting for default probabilities). If you see bonds with yileds that widely differ from those, be very wary.

There are some people that do well with high yield bonds, I think that the 7.5% per annum that you mention is achievable.