High yield maintains its edge High yield maintains its edge http://www.federatedinvestors.com/static/images/fed-logo-amp.png March 15 2019

High yield maintains its edge

While yields relative to Treasuries are below historical medians, high yield's higher coupon rate continues to lift returns.
Published July 18 2018
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Despite a generally lackluster environment for fixed income, the high-yield market continues to perform relatively well. For example, as of June 30, the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index was positive on a monthly, quarterly and year-to-date basis. By contrast, its high-quality counterpart, the Bloomberg Barclays U.S. Aggregate Bond Index, was negative for all three periods.

In fact, high yield has outperformed high quality for 10 consecutive quarters. To be sure, the ride has been far from smooth, especially given the challenges of rising yields and volatile credit spreads—that is, the gap between yields on high-yield bonds and comparable-maturity Treasury bonds. Much of the volatility has been driven by the strength of current economic conditions and strong corporate earnings juxtaposed against trade war fears, Federal Reserve tightening and geopolitical concerns. 

But while it’s easy to get caught up in the movement of yield spreads, it’s important to remember that in a flat-to-modestly increasing yield-spread environment, high yield bonds can generate excess returns versus high quality simply because of their higher coupons. And recent high-yield outperformance has been dominated by coupon income.

That’s one of the reasons why Federated’s fixed-income sector committee is maintaining a modest overweight to high yield despite well-below-median yield spreads. Although the ultimate low in yield spreads lies ahead, high yield does not need spread tightening to outperform high-quality fixed income. It does need spreads to not widen aggressively higher. From our perspective, the current strong economic and earnings growth environment delivers those favorable conditions.

Tags Fixed Income . Income .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Bloomberg Barclays US Corporate High Yield 2% Issuer Capped Index: The 2% Issuer Cap component of the US Corporate High Yield Bond Index. Bloomberg Barclays US Corporate High Yield Bond Index is an unmanaged index which measures the USD-denominated, high yield, fixed-rate corporate bond market. The index follows the same rules as the uncapped version, but limits the exposure of each issuer to 2% of the total market value and redistributes any excess market value index wide on a pro rata basis. The index was created in 2002, with history backfilled to January 1, 1993. Indexes are unmanaged and investments cannot be made in an index.

Bloomberg Barclays U.S. Aggregate Bond Index: An unmanaged index composed of securities from the Bloomberg Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indices are rebalanced monthly by market capitalization. Indexes are unmanaged and investments cannot be made in an index.

Federated Investment Management Company