With the extended bull market in full swing, the risk-on mentality of investors have led them to gravitate towards high-yield debt assets, but with the Federal Reserve interest rate decision looming next week, has high-yield become somewhat of a safe haven? 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 in today’s environment of rising rates, high-yielding bond strategies may be the safer option.
According to Sean Hanlon, Chairman, CEO and Chief Investment Officer of Hanlon Investment Management, these high-yielding bonds could be the best defense against more rate hikes to come despite most having below-investment grade debt issues.
“High yield bonds, being below investment grade, tend to be more sensitive to the economic environment, like stocks, than they are to interest rates,” said Hanlon, in an article. “The high yield bond market, oddly, has been a bit of a haven this year. Traditionally not seen as such, high yield bonds have provided some insulation from rising interest rates and the strong dollar that are affecting the fixed income market this year.”
Hanlon also cited that tax cuts have allowed high-yield debt to flourish as corporate earnings have been elevated. In addition, the steady rate of interest rate hikes has allowed high yield issuers to defer the brunt of the borrowing costs.
ETF Options for High-Yield
Fixed-income ETFs can offer investors with high-yield exposure, such as the iShares iBoxx $ High Yield Corp Bd ETF (NYSEArca: HYG), iShares 0-5 Year High Yield Corp Bd ETF (NYSEArca: SHYG) and SPDR Blmbg BarclaysST HY Bd ETF (NYSEArca: SJNK). With the aforementioned available in an ETF wrapper, it gives investors exposure to high-yield assets without the additional credit risk of direct exposure to the bonds themselves.