Investor activity in the U.S. high yield fixed income market is suggesting that while the economy may weaken, it won’t dip into a recession. High-yield bonds gained 5.9% in July, their biggest one-month rally in a decade, according to Bloomberg, and they’ve also been rising in August.
This rally comes as the Federal Reserve is looking to curb inflation through aggressive rate hikes.
“The high-yield market is definitely pricing in some level of stress, but it’s pricing in nowhere near recession-type levels,” Citigroup Inc. strategist Michael Anderson told Bloomberg.
Investors seeking a novel way to enter the high yield market while still managing risk may want to consider the Donoghue Forlines Tactical High Yield ETF (DFHY). DFHY is a fund of funds that tactically allocates exposure to high yield ETFs or U.S. Treasury ETFs based on daily buy-sell signals.
According to FactSet’s Analyst Report, DFHY tracks an index that invests primarily in U.S.-listed high yield ETFs while applying downside protection. The risk-managed fund employs a tactical overlay strategy that allows a switch to U.S. Treasury ETFs and other cash equivalents during bearish market conditions. This tactical switch is determined by the daily buy-sell signal.
Full exposure is allocated to high yield ETFs when a buy signal is triggered, while 80% is allocated to U.S. Treasuries when it triggers otherwise. Both high yield and Treasury ETFs must meet certain expense ratios and AUM requirements to be eligible for index inclusion.
In addition, both types must have an investment process that excludes factors, hedges, and long/short strategies. The underlying ETFs are weighted based on their respective expenses and AUM, whether it’s junk bonds or Treasuries.
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