As more people jump back into the bond market, investors are looking deeper into the debt market and picking out riskier securities, such as subordinated debt. Through a relatively new exchange traded fund, investors can also easily access this market.
Money managers are investing in high-yield subordinated debt as safety bets pushed down yields on investment-grade government debt this year.Due to the increased demand, banks have sold $21.8 billion of subordinated bonds so far this year, the fastest pace since 2007 and a 18% rise year-over-year, reports Mike Cherney for the Wall Street Journal.
Subordinated bonds have a lower seniority to traditional bond securities. Consequently, subordinated debt investors are repaid after other bond that have a more senior claim on the issuer’s assets in case of a default. Since investors are exposed to this additional risk, subordinated debt pays out a higher yield than traditional debt to compensate investors.
“Subordinated bank debt, especially in the U.S., offers perhaps the biggest opportunity in the fixed-income market right now,” Scott Carmack, a manager at Leader Capital Corp., said in the article.
More investors are warming up to subordinated debt and other riskier bonds from banks after regulators implemented new rules to increase capital at financial institutions.
According to Barclays data, subordinated debt has increased 5.2% year-to-date, including price appreciation and interest payments. In comparison, senior bank debt has returned 2.5% and the 5.1% return on investment-grade corporate debt.