The latest rate hike from the Federal Reserve is contributing to an environment in which high-yield bond funds have become increasingly attractive to investors.
The Fed on Wednesday raised interest rates by 25 basis points. This latest rate hike – the Fed’s ninth over the past year – raises the target range for the federal funds rate to 4.75% and 5%. The Fed has also hinted that the fed rate will rise to 5.1% by the end of the year.
In a press conference on Wednesday, Fed Chair Jerome Powell said that while “inflation has moderated somewhat since the middle of last year,” inflation “remains well above” the Fed’s “longer-run goal of 2%.”
“The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell added.
Media outlets have pointed out that changes in the Fed’s post-meeting policy statement suggest that regular rate increases could be winding down. The U.S. central bank has included a line in its statement that the FOMC expected “ongoing increases” to the federal funds rate for months. The line was cut from the committee’s latest post-meeting statement. Instead, the statement said: “some additional policy firming may be appropriate,” and that the FOMC “will closely monitor incoming information and assess the implications for monetary policy.”
A Favorable Environment for High Yield
Not only has the Fed’s latest rate increase helped make high-yield bond funds more appealing to investors, but stronger fundamentals, lower debt issuance, and low default rates have also served as additional tailwinds for the asset class. Yields for so-called “junk bonds” as measured by the ICE BofA US High Yield Index are at 8.72% as of March 21, up from 5.95% a year prior.
See more: Chart of the Week: Advisors Looking to Understand High Yield Credit Risk
Advisors are increasingly wanting to learn more about high-yield fixed income — and in particular, about the risk inherent to the asset class.
“We are seeing the sentiment toward high yield improve in the past month with more advisors looking to learn about these funds and more planning to increase exposure than decrease going forward,” said Todd Rosenbluth, head of research at VettaFi.
Investors wanting the reward of high yields with less risk may want to consider the Donoghue Forlines Tactical High Yield ETF (DFHY). The fund 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.
DFHY 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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