By now, the reasons why 2022 was a bad year for bonds are well documented. Record-high inflation. Soaring gas prices. The war in Ukraine. The Federal Reserve’s aggressive interest rate hikes. In particular, high yield fixed income lost nearly 11%. Fears of a recession and rising interest rates drove investors to take out a record $52.8 billion from the so-called junk bond market in the first three quarters of 2022.
However, there is some good news: The selloff boosted yields, which could provide a buying opportunity.
“The current yield level of roughly 9% offers an attractive entry point from an income perspective,” wrote Morningstar’s Chiayi Tsui. “Certainly, risks lurk, but with disciplined and judicious credit selection, so do opportunities.”
Typically, high yield bonds have been less interest rate-sensitive than higher-quality fixed income asset classes and not as volatile as dividend-paying stocks. Yields on these bonds have nearly doubled from where they were at the end of last year, making them an appealing asset class to consider for investors looking for income amid a possible recession on the horizon.
For fixed income investors looking to take advantage of high yields while mitigating their downside exposure, the Donoghue Forlines Tactical High Yield ETF (DFHY) is worth looking into. DFHY seeks to participate in the high yield bond market, which offers generally high coupon rates to potentially provide a high level of current income. It does this by seeking to provide investment results that correspond to the performance of the FCF Tactical High Yield Index.
The fund aims to capture most of the upside and avoid the majority of the downside of the high yield asset class during a full credit market cycle. It uses defensive tactical indicators to mitigate downside volatility and preserve capital by shifting primarily towards intermediate-term Treasury exposure during market declines.
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