In August, the Bank of England cut interest rates by 0.25% – the fifth reduction since July 2024. As rates trend lower, many savers are seeing their cash returns dwindle and are starting to look for alternative ways to generate regular, reliable income. One option, as highlighted below from Invesco, is corporate bonds.
But today’s credit markets aren’t straightforward. Credit spreads – the premium investors earn for taking on credit risk – have tightened sharply in recent years. That means while yields may look attractive, the cushion for error has shrunk and investors need to be careful about where they invest.
A closed-ended structured product like an investment trust can access income streams that may pose too much liquidity risk for open ended funds. They enable tactical use of gearing, no redemption pressure, and the ability to hold smaller, less liquid bonds that offer attractive yields.
Defensive positioning in practice
Credit spreads in the high yield market have halved, from around 600 basis points in 2022 to around 300 basis points today (in the ICE BofA European Currency High Yield Index). Invesco believes that this is not just a technical detail, but a major shift in the market’s risk/reward dynamic. With less compensation for taking on credit risk, Invesco has leaned into a more defensive stance in the Invesco Bond Income Plus (BIPS) investment trust.
- High yield exposure reduced: The trust has steadily rotated away from high yield, reducing exposure from 83% to 66% in recent years – even while maintaining its strong income profile.
Source: Invesco. Reference index for High Yield Spread is ICE BofA European Currency High Yield Index
Rhys Davies, Manager of Invesco Bond Income Plus says: “We have nearly halved our gearing to 10% from 18% three years ago, as we believe that valuations no longer justify taking on added risk.
“We are also positioned to benefit from falling interest rates but through risk control, we’re able to manage volatility as we aim to protect capital while still delivering a high level of income.”
- The Trust has over 200 holdings across 150+ issuers, spanning high-yield corporates, subordinated financials, and investment-grade credit, with a limited single-issuer risk, with the largest positions accounting for just over 2% of NAV, as the managers don’t believe in risky concentrated positions in this environment.
- The Trust can also target high-coupon, subordinated debt from well-capitalised financials and niche issuers. These are assets that offer strong income but aren’t easily accessed by open-ended funds, which must manage daily liquidity and redemption risk.
The proof is in the payout
BIPS currently delivers a 7.1% yield and continues to trade at a premium, which allows for new share issuance and continued growth.
Rhys Davies concludes: “We believe BIPS offers income with resilience. As rate cuts continue, many investors will find it harder to sustain the levels of income they may have been used to. We have developed a portfolio that maintains flexibility to increase credit exposure when valuations become more compelling, without taking unnecessary risks. Our goal is to be able to deliver investors the income they seek without giving up yield”.
