The bond market has already been tricky to navigate, especially given the overall weakness in prices amid rising inflation and a tightening Federal Reserve policy. This is especially the case for fixed income investors who are opting to chase yield via riskier assets.
With yields rising across the board for bonds, investors are thinking twice before jumping into risky assets like high yield bonds. In a market environment where recession talks are not uncommon, high yield may not be worth the risk when investment-grade debt could be the easier path in a market where unknowns remain.
“Since interest rates and bond prices move in opposite directions, U.S. junk bond values have dipped to the lowest levels since May 2020,” a CNBC report explained.
“But yields are at 7.5% as of May 17, up from 4.42% since the beginning of January, according to the ICE Bank of America U.S. High-Yield Index,” the report added further.
Getting Active With High Yield
One way to approach the high yield debt market is to opt for an active management strategy. This essentially puts the selection of high yield debt holdings in the hands of professionals as opposed to self-directed investors or advisors doing the legwork themselves.
This can all be had with an active exchange traded fund (ETF) like the American Century Select High Yield (AHYB), which has an expense ratio of 0.45%. The fund actively invests primarily in BB- and B-rated debt issues in pursuit of high current income and risk-adjusted returns.
The fund itself is subadvised by a veteran team at Nomura Corporate Research and Asset Management, a firm that has specialized in the high yield market since its founding in 1991. According to the fund’s product website, the managers apply a research-intensive process that seeks to identify companies that they believe can:
- Carry debt loads across market cycles
- Generate sustainable cash flows
- Decrease leverage on their balance sheets in pursuit of higher ratings
In order to crack into its diverse array of holdings (almost 480 as of April 30), the fund utilizes a top-down macro overlay that establishes duration and ratings distribution. Then, sector allocations are determined through a bottom-up security selection.
The majority of the fund (55%) ranges between five and 10 years, thereby limiting duration within the intermediate range in order to minimize rate risk while enhancing yield at the same time. As such, the weighted average coupon is 5.54% — once again, as of April 30.
For more news, information, and strategy, visit the Core Strategies Channel.
