High-yield bonds are held in many of the accounts that I manage and they have been impacted somewhat by recent events so I would like to share the following comments from Anthony Valeri, CFA to provide some perspective.
Before we get started, let’s remember that high-yield/junk bonds are not investment grade securities and they involve substantial risks. Generally, they should be part of a diversified portfolio of sophisticated investors.
“Normally strong economic data is supportive of high-yield bonds, as a growing economy generally boosts the credit quality of underlying high-yield bond issuers. However, this is the second time that tapering fears have led to cheaper high-yield bond valuations despite an improving economy. In May of this year, high-yield bonds weakened when the Fed first mentioned tapering. Similarly, the first full week of November witnessed cheaper high-yield bond valuations as better economic data raised the prospect of the Fed tapering bond purchases.
A low default environment will likely limit the degree of high-yield bond weakness absent a weaker economy or signs that Fed tapering may dramatically impair market liquidity.
We expect high-yield bonds to prove more resilient to rising rates but caution investors that returns may be lower over the coming year.”
Please feel free to contact me if you wish to discuss further.
Until next week,
Susan R. Linkous
Past performance is not a guarantee of future results. The comments above are opinion only and should not be taken as specific investment advice.