Bonds: High Yield

According to a July survey conducted by VettaFi and State Street Global Advisors, high yield credit strategies were the bond style most appealing for advisors to add to client portfolios. With treasury yields narrowing and the Federal Reserve aggressively hiking rates to tackle inflation, investors are looking to take on more credit risk to receive higher yields. This is evident as three top high yield corporate bond ETFs, that collectively manage $44 billion, pulled in $4.7 billion in flows during July. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) brought $1.9 billion in new assets during July, while the SPDR Bloomberg High Yield Bond ETF (JNK) and the iShares Broad USD High Yield Corporate Bond ETF (USHY) brought in $1.7 billion and $1.1 billion, respectively. It appears that investors currently prefer high yield bond ETFs with higher risk profiles to funds that offer more protection against rising rates.


Finsum: Due to the Fed’s rising rates policy and narrowing yields, investors flocked to high-yield bond ETFs last month. 

Fixed-income investors are looking for an out of rising yields and lower bond prices, and junk bonds might be the place for income investors to find relief. According to BlackRock, the underlying credit risk is much lower than the market is assuming, because high-yield issuers actually have strong stable balance sheets. BR and KKKR & Co. Inc. are purchasing more junk bonds and similar market segments given their relative value. While they do expect market conditions to tighten they do not anticipate an unusually high default rate. Investors should be weary of additional volatility that could be induced by macro factors moving forward.


Finsum: If a bond market crisis hits high yield debt due to a full-blown recession, the Fed would most likely roll back the tightening currently taking place. 

Pick your favorite recession signal and there is a chance it's flashing the warning signs. Most are eyeing the 2-to-10 year yield curve which inverted in early April. Investors worried about the recession should turn to high-yield bonds, but specifically, those ‘sin’ goods are the best remedy for the recession. Alcohol and Tobacco are two of the best performing industries in the 12-months leading to a recession and the years after. Food and beverage, utilities, and healthcare all are great performers as well. The high yield bonds to avoid are telecommunications and retail shopping, as their returns can vary drastically.


Finsum: Junk bond yields are relatively high right now and less sensitive to Fed moves, high yield bonds are a potentially good alternative right now.

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