High-Yield Coporate Bond Strategies Still in Favor

Benchmark treasury yields ticked higher across the board, which saw the 10-year touch the 3% marker once again this year, but despite this, high-yield corporate bonds are still an attractive option as the extended bull market still has investors pushing the risk-on button. As the curtain closes on the bull run and the late market cycle, the natural propensity for fixed-income investors is to shift back to safer government debt, but until then, higher-yielding corporate bond strategies are still in favor.

Just like the first quarter of 2018, high-yield bond strategies led a Morningstar Inc list of top fixed-income performers again during the second quarter, taking seven out of the top 10 spots. High-yield bond strategies have been outperforming their investment-grade counterparts by an average of 2%.

This trend could persist for the next year or possibly two as the bull market continues its forward momentum.

“In the current environment, where the economic and corporate backdrop remain promising, corporate bonds should fare better than developed market sovereign debt,” said Kerry Craig, global market strategist at J.P. Morgan Asset Management.  “Similarly, even if the anticipated total returns are modest, the riskiest section of corporate bonds, known as “junk bonds”, should beat higher-grade corporate bonds.”

Additionally, Craig cites that its been high-yield, below-investment grade debt outperforming its higher credit quality peers.

“More favourable fundamentals still bode well for the high-yield segment of the corporate bond market,” said Craig. “Investment grade credit indices have experienced a deterioration in credit quality and a commensurate rise in duration and leverage adding to vulnerabilities as interest rates rise.”