, CFA, Co-Head of High Yield Investments and Senior Portfolio Manager and
, CFA, Co-Head of High Yield Investments and Senior Portfolio Manager
Since 1987, there have been 16 quarters in which 5-year Treasury yields rose by at least 70 basis points. During 10 of those quarters, high-yield bonds delivered positive returns. During the other six quarters (in bold below), high-yield bond returns were negative - but, they rebounded into positive territory the following quarter.
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Why do high-yield bonds perform well in rising rate environments? We see three reasons:
The stretch for yield looks set to continue now that fears over an imminent Federal Reserve (Fed) rate hike have diminished, though investors may want to think twice before overreaching for yield.
Last week, minutes from the Federal Reserve’s Open Market Committee’s (FOMC) March meeting confirmed that the FOMC did not intend to convey a more hawkish posture following its March meeting and the U.S. central bank is in no rush to raise interest rates. Instead, concerns about persistently low inflation suggest that the Fed intends to keep rates “low for long.”
Stubbornly low yields have made income tough to come by in recent years, and they have sent investors searching for yield and income wherever they can find it.
As I write in my new weekly commentary, the prospect of a prolonged period of low rates is encouraging investors to continue to stretch for yield by entering ever