Is there still potential in the bond market?

Along with an increase in the financial market and high interest rates in the Baltic countries, the bond market is attracting more interest from investors. Do the securities still offer good investment opportunities, or are there signs that the Baltic market is getting too hot?

A number of factors have contributed to the attractiveness of the regional securities market in recent years. First, rising production levels, which is a global trend, not a regional phenomenon. Second, the entry of new distributors into the market, namely well-known local companies, which attracted both new capital and investors. Crucially, the new issuers represent a number of sectors, including manufacturing, which are attracting increasing interest from institutional investors. There are those who wonder if the current increase in market activity is a possible bubble. However, the current market dynamics should not be seen as something unusual, since the trading volume of securities and bonds on the Baltic Exchange is still a relatively small part – only 20% of the total. This trend is positive, as investors have the opportunity to buy and sell individual bonds not only at the time of issue, but also throughout their lifetime.

Although there is still potential to develop this sector at a local level, there is no reason to predict that there will be many new bond issues on the market in the second half of the year. It is expected that there will be some companies that will try to refinance existing bonds that will mature later this year. At the same time, in 2025, more companies will have to refinance existing bonds. It should be noted here that the current market rates are much higher than 3-5 years ago, so it will be interesting to see if the issuers will succeed in the current conditions and how this affects the market.

What should be considered before investing?

When choosing a bond, one should first evaluate the issuer’s ability to pay the coupon (interest in bond terminology) and return the principal when it matures. If the expected yield from the security is high, for example 10 percent or more, bondholders are advised to monitor the company’s financial position regularly – quarterly or semi-annually. Secondly, it is necessary to check the terms of the prospectus, or the document that contains detailed information about the relevant security. If problems occur, an investor who did not do so may be in for an unpleasant surprise. Although we have seen great progress in recent years in the protection of investors, however, in this sense, the market is still at a stage of development and there are often situations when the rights of investors are not investments are properly protected.

Diversification is an important aspect to consider when investing in high risk and potentially more profitable financial instruments. It is very daring to invest in bonds of one or two issuers, because if there are problems, you may have to make a big loss. According to our calculations, the best portfolio includes 30-50 securities. CBL Asset Management manages two bond funds – CBL Eastern European Bond Fund and CBL Global Market Bond Fund – which hold around 40 different securities. By selecting these funds, exposure to Baltic issuers is also gained, which makes up about 15-30% of the portfolio share. Such investment returns are also cost effective. When they make deposits from 100 euros, their purchase and storage in the Citadele bank is free of commission. The same cost – asset management – is included in the daily asset unit value.