With interest rates rising and the Federal Reserve putting the pedal to the metal on that front, fixed income investors are enduring trying times in 2022.
On that note, it’s likely to surprise some market participants that high-yield corporate bonds could prove durable amid the Fed’s latest tightening cycle. A slew of exchange traded funds provide exposure to junk bonds, including the newly minted American Century Select High Yield (AHYB).
AHYB, which debuted last November, is actively managed — a potentially alluring trait in the junk bond space as interest rates climb. Additionally, the American Century ETF could be a pleasant surprise among bond funds this year.
“Factors favoring high-yield bonds should be an economy that remains strong even as it cools off from last year’s post-pandemic surge, high yield’s lower sensitivity to rising interest rates, and of course, their yield advantage over higher-quality corporate and government bonds,” says Morningstar analyst Dave Sekera.
Junk bonds typically have shorter durations than investment-grade corporates, indicating that AHYB could offer investors less rate risk than an investment-grade fund. With default rates low and the economy on decent footing, it could be appropriate for some income investors to embrace credit opportunities with AHYB. The fund has an option-adjusted duration of four years (intermediate-term), and over 89% of its holdings are rated BB or B.
“Looking forward, we continue to think there is value in corporate bonds, especially high yield. The main reason is that our U.S. economics team continues to forecast relatively robust economic growth in the United States over the next three years,” adds Sekera.
Adding to the allure of AHYB in the current market environment is that its managers focus on companies that can service debt obligations across a variety of market settings as well as those generating cash and paring leverage, which can lead to credit upgrades and bond price appreciation. Plus, credit spreads aren’t alarmingly high today, putting another factor on AHYB’s side.
“The credit spread for investment-grade bonds is less than for high yield, and investment-grade bonds often have longer maturities. As such, investment-grade bonds have longer duration and are more sensitive to underlying interest rates. High-yield bonds generally have shorter duration owing to the combination of their higher yield and shorter maturities. As such, high-yield bonds are less sensitive to interest-rate risk,” concludes Sekera.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
