High Yield Index Returns During Periods of Rising Rates

October 2018

Many investors tend to mentally group all of fixed income into one asset class, when in fact there are many different asset classes within fixed income that behave differently from each other.

For example, high yield bonds actually have a slight negative correlation to the 10-Year Treasury, since they are more sensitive to the credit quality of the underlying company than the overall interest rate environment. Investors looking to diversify their interest rate exposure may look to high yield funds to complement their existing investment allocation.

The chart below shows returns for the Citigroup 10-year Treasury Benchmark as well as the ICE BofA Merrill Lynch US High Yield Cash Pay Index during time frames where the 10 Year Treasury has risen by 1.00% or more since SMHCA started managing high yield in 1995.

High Yield Index Returns During Periods of Rising Rates

Time Period 10-Year Treasury Basis Point (BPS) Change Citigroup 10-Year Treasury Benchmark Return BofA Merrill Lynch US High Yield Cash Pay Index Return
12/31/1995-6/30/1996 +126 bps -5.01% 2.85%
09/30/1998-3/31/2000 +146 bps -3.90% 1.73%
05/31/2003-6/30/2004 +116 bps -4.27% 11.91%
05/31/2005-6/30/2006 +109 bps -4.63% 6.11%
11/30/2008-6/30/2009 +115 bps -3.13% 38.78%
11/30/2008-2/28/2011 +116 bps 1.39% 36.20%
6/30/2012-12/31/2013 +133 bps -4.83% 10.29%
6/30/2016-09/30/2018 +150 bps -4.48% 6.86%

Source: Zephyr, Citigroup (SBTSY10) and MLHY (MLHYMAST)

Actively managed high yield funds should be considered as an investment choice for investors who are looking for higher income than investment grade managers, or are looking for an asset class to diversify from equities and traditional fixed income managers. Negative headlines, misconceptions, and the “junk” moniker given to this asset class have continued to misdirect the public’s perception.

As investors look to maintain their monthly income or total return objectives during a potential rising rate environment, they should look past the negative reputation that high yield bonds have earned over the years and instead look at how the asset class interacts with other investments in their portfolio.

Past performance is no guarantee of future results. The referenced indices are shown for general market comparisons and are not meant to represent any fund. Investors cannot directly invest in an index; unmanaged index returns do not reflect any fees, expenses or sales charges.

Important Risk Information
All investing is subject to risk, including the possible loss of the money you invest. There’s a risk with any bond that the issuing company might not be able to meet its obligations and the risk is higher with high-yield bonds. High-yield bonds can sometimes be less liquid than investment grade bonds. Please note that that high-yield bonds tend to move in the same direction as stocks. Therefore, if an investor is looking diversify a stock-heavy portfolio, he or she might not achieve that objective with high-yield bonds.


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