Corporate High Yield Debt May Provide Better Downside Protection Than Stocks

With stock markets continuing to be volatile and analysts fearing that a recession could be looming over the horizon, high yield corporate bonds offering weightier yields than they have in recent years may provide investors with better downside protection than stocks, according to Nuveen. Per a report from MarketWatch, after conducting a stress test based on a hypothetical 20% decline in equities and current bond and stock dividend yields, Nuveen found that while stock prices could fall 19.5%, high yield bonds would lose only 4.5%.

Yields on so-called corporate junk bonds have also skyrocketed. The yield on the ICE BofA U.S. High Yield Index, which tracks companies with below investment-grade credit ratings, has more than doubled to about 8.4% from a record low of less than 4% roughly a year ago, even though “credit fundamentals appear strong,” wrote Saira Malik, Nuveen’s chief investment officer, in a note to clients on Monday.

Malik argued that the record issuance of pandemic debt at low yields has been a tailwind for companies with weaker credit profiles, considering that “debt burdens aren’t excessive and low financing rates have been locked in.” Nuveen estimated that 75% of outstanding high yield corporate debt will come due after 2025, which would offer companies issuing this debt some breathing room if the U.S. economy falls into a recession.

In May, BondBloxx Investment Management launched three high yield corporate bond ETFs which track ratings-specific sub-indexes of the ICE BofA US Cash Pay High Yield Constrained Index: the BondBloxx BB Rated USD High Yield Corporate Bond ETF (NYSE Arca: XBB), which seeks to invest in bonds rated BB1 through BB3; the BondBloxx B Rated USD High Yield Corporate Bond ETF (NYSE Arca: XB), which seeks to invest in bonds rated B1 through B3; and the BondBloxx CCC Rated USD High Yield Corporate Bond ETF (NYSE Arca: XCCC), which seeks to invest in bonds rated CCC1 through CCC3.

Launched in October of 2021 to provide precision ETF exposures for fixed income investors, BondBloxx was co-founded by ETF industry leaders Leland Clemons, Joanna Gallegos, Tony Kelly, Mark Miller, Brian O’Donnell, and Elya Schwartzman. The team has collectively built and launched over 350 ETFs at firms including BlackRock, JPMorgan, State Street, Northern Trust, and HSBC.

“Our conversations with investors have reinforced what we already knew – there is significant demand for more targeted fixed income products,” said Kelly. “Our initial product suites aim to create a full toolkit for high yield investors looking to implement their specific views on the market, and we anticipate extending this approach to other fixed income asset classes.”

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