Get insight into why high yield bonds may be an attractive diversification tool in our lower-for-longer interest rate environment.
March 22, 2019 | 2 minute read
At their meeting this week, Fed policymakers held the target federal funds rate steady once again and reasserted the dovish stance that largely ignited the market rally in late December.1
Prices on U.S. Treasuries jumped immediately after the meeting as the yield on the 10-year U.S. Treasury note dropped to just 2.52%.2 With the Fed firmly on the sidelines for now, the 10-year yield has seen an approximately 70 bps decline in the past four months and reached its lowest level since January 2018.2
Since equity markets began their rise on December 26, 2018, fixed income asset classes also have risen, with a notable divergence emerging. In that time frame, high yield bonds have returned approximately 7.7% versus 4.1% for senior secured loans and 2.3% for the Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for traditional core fixed income investments.3
High yield bond funds have seen significant YTD inflows versus the historic outflows they experienced in Q4 2018.4 Amid diminished rate concerns, bank loan mutual funds have seen YTD outflows, though they remain under Q4 2018 levels.4
Investor interest in high yield bonds has increased this year as the Fed’s shift has further compressed yields across traditional fixed income asset classes and as the U.S. economy continues to experience slow-but-positive growth with minimal inflation pressures.
While the performance of each fixed income class can vary across the phases of a market cycle, the Fed’s recent lower-for-longer emphasis may encourage investors to continue looking beyond traditional core fixed income allocations and diversify their holdings within fixed income, including high yield bonds.
Private credit has increasingly become the preferred source of financing for PE sponsors, with direct lending volume jumping 60% over last year’s level.
