Stubbornly low interest rates still have many investors reaching far and wide for yield. But for others, high-yield corporate bonds are a bridge too far. Are they too risky? Do they hold up in volatile markets? Do they represent too much of an unknown?
In fact, high-yield bonds have historically performed predictably—even in rough market environments. A historical overview of high yield shows that the sector’s yield to worst at the start of the investment period has been a remarkably reliable indicator of its returns over the subsequent five years. That relationship held true even during the global financial crisis, one of the most stressful periods of economic and market turmoil on record.
Why? High-yield bonds provide a consistent income stream that few other assets can match. And when high-yield issuers call their bonds before they mature, they pay bondholders a premium for the privilege. This helps compensate investors for losses suffered when some bonds default.
What does all this mean for today’s investors? High-yield bonds may experience some near-term volatility, but for investors with a long-term lens, short-term drawdowns are no reason to accept less yield.
The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams, and are subject to revision over time.