The presumption of the Federal Reserve’s possible rate cuts in 2019 are translating to strength in U.S. equities and certain corners of investment-grade bonds, but riskier assets like high-yield debt are feeling the lows. Fixed income investors navigating through the waters of high yield should take caution.
According to a Nasdaq report, the “dovishness from the Fed has been bullish for most of the debt market, with sovereign yields falling and corporate debt getting a boost. However, the riskiest corner of the market, triple C junk bonds, have been left out, with the group falling by 1.5% since May. Triple B bonds, by comparison, were up. The odd part about the losses is that signs of an interest rate cut are usually very bullish for junk bonds because they would mean lower interest burdens for the companies. That said, anxiety about the economy is high enough that such benefits were negated.”
“This whole situation makes sense in that the downside risk of a sinking economy is greater than the upside of lower interest rates for this subsector,” said financial news site FINSUM. “Thus, the bonds are losing. In other parts of the credit spectrum, the risk-reward balance is different.”
Where are the High-Yielding Opportunities?
As market headwinds from a trade war impasse buried the capital markets in volatility during the month of May, a de-risking occurred in funds specializing in high yield like The High Yield ETF (NYSEArca: HYLD). The fund, however, adjusted its strategy by making a move towards quality debt holdings as investors sought more fixed income exposure during this volatile swing.
HYLD seeks high current income with a secondary goal of capital appreciation. The Sub-Advisor seeks to achieve the fund’s investment objective by selecting a focused portfolio of high-yield debt securities, which include senior and subordinated corporate debt obligations, such as loans, bonds, debentures, notes, and commercial paper.
The fund does not have any portfolio maturity limitation and may invest its assets in instruments with short-term, medium-term or long-term maturities. It invests at least 80 percent of its net assets in high-yield debt securities.
With investors starved for yield, the tide could turn for high-yield bond ETFs, especially now that the Federal Reserve is sounding more accommodative with respect to interest rate policy. Following the fourth and final rate hike of 2018, the central bank is now taking a more cautious approach with rates, which could lead to static rates through the rest of 2019.
The central bank didn’t show much dynamism in 2018 with respect to monetary policy, obstinately sticking with a rate-hiking measure with four increases in the federal funds rate. That appears to have changed given the current economic landscape, and especially in the capital markets as Fed Chair Jerome Powell is now preaching patience and adaptability.
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