The old adage of “no risk, no reward” is still thrown around as part of investment vernacular, explicitly stating that those who take on a high degree of risk will reap the benefits of their emboldened maneuvers. However, with the volatility investors have experiencing in the markets as of late, they may have no choice, but to take on more risk–starting with more high-yielding assets in their fixed income portfolios.
In the current economic climate, high-yield bonds might be considered a safe haven and for most investors, it’s hard to imagine high-yielding debt to be associated with “safe,” unless the word “not” precedes it, but to fixed-income investors in the know, these bonds have been anything, but junk in a rising rate landscape. As the curtain closes on the bull run and the late market cycle, the natural propensity for fixed-income investors is to shift back to safer government debt, but in today’s rising rate environment, high-yielding bond strategies may be the safer option.
“High yield credit has been the one bright spot in a year of negative fixed income returns, returning 1.65% in 2018 for the Bloomberg Barclays High Yield Index,” noted Winthrop Capital Management president and chief investment officer Greg Hahn’s latest report regarding the state of the fixed income markets. “Spreads in high yield credit hit their tightest levels in 10-years at 312 bps. High Yield returns have been driven by lower grade credit where CCC have experienced a year-to-date total return of 5.27% versus -0.42% for BB bonds.”
Sometimes fear can be a great motivator and according to CNN Money’s Fear & Greed Index, there’s a lot of it to go around lately with the volatility in the capital markets. The extreme tilt to the left shown below could be the catalyst for more risk-taking.