The Dilemma of Corporate Bonds: High Returns with High Risks

Since the coronavirus pandemic, companies have been luring investors with promises of high returns through corporate bonds. Small investors, attracted by the low-interest rates on savings accounts, have shifted toward these company securities. However, the economic downturn has weakened many businesses, making bond repayments a challenge.

Despite difficulties, bond issues are on the rise. Various businesses, including real estate agencies, auto services, and canning manufacturers, offer them. According to bond expert Jan Topinka from the Havel & Partners law firm, around 210 bond issues worth 30 to 35 billion Czech korunas are due for repayment next year, and ten to twenty percent of these companies may face serious problems.

The issue is that many companies may not be viable and are operating thanks to the inflow of new capital, often sought through bond issues. In July this year, companies issued bonds worth over four billion korunas, a year-on-year increase of 40%.

Forty-four percent of issues provide yields between eight and ten percent, and another 18 percent, mainly with a smaller volume, provide gains over ten percent. “The market is preparing for a fall in interest rates,” analyst Vladimír Pikora from Comfort Finance Group summarized. The average maturity period has shortened from 3.81 years in June to 3.36 years.

A survey by Ipsos among a thousand Czech investors for the Bondster platform showed that 16 percent of savers lost on corporate bonds last year. Vladimir Bruna, head of B&K Real Estate Investment, warned that no investment is ever 100% guaranteed, especially not in corporate bonds. The success of an asset can only be determined after the entire period, including the return of the principal.

Investing in corporate bonds may be potentially profitable, but it also carries significant risks. As the market prepares for a fall in interest rates, investors are urged to diversify their portfolios to ensure the best protection and valuation of their investments.