As we have written about, historically speaking the high yield bond market has performed well during periods of rising rates, due to the fact that the high yield market tends to have a lower duration than other fixed income asset classes, has a zero to negative correlation to Treasuries, and generally rates are rising during periods of improved economic environments, which is a positive for these credits. However we were recently asked if this time is it is different because of the historically low rates. We believe that the answer is both no and yes.
Generally speaking, we believe that the factors that have helped insulate the high yield market from higher rates in the past still are valid today—the relatively low duration and the fact rates generally increase during an improving economy. Addressing the latter first, we would expect that if the Fed does eventually raise rates, it would need to be on the back of an improving economy. We would expect that in order for a sizable increase in rates we would need to see an improvement in the economy off of where we are today, and we would expect those economic conditions would benefit corporate credit.
Turing to the relatively low duration, looking at duration levels over the past nearly 15 years, we see that current duration levels are certainly not elevated by historical standards.1