Market & Topical Perspectives

High Yield Bonds: That Was Then, This Is Now

High Yield Bonds: That Was Then, This Is Now

After many years of mostly supportive conditions, fixed income assets today appear to be pinned in a vise of expectations—of persistently high inflation, of more restrictive monetary policy, of slower economic growth, of mounting debt piles, of ongoing geopolitical discord.

Key Takeaways

  • Key-Takeaway

    The sharp rise in interest rates has punished duration-heavy fixed income assets, but even high yield bonds were not spared thanks to generationally low yields.

  • Key-Takeaway

    Long a source of comfort for investors, the “Fed put” may not be as readily available as it has in the past as the central bank battles inflation levels not seen since the early 1980s.

  • Key-Takeaway

    Central bank intervention over the years has blunted the peaks and valleys of the credit cycle, denying markets of the cleansing catharsis and reallocation of capital that characterizes a cycle’s bottom.

  • Key-Takeaway

    If history is any guide, the multiple inversions of the yield curve this year augur ill tidings for both the economy and the high yield bond market, though there are potential mitigating factors.

  • Key-Takeaway

    While such an uncertain environment encourages downside risk mitigation, in our view, idiosyncratic opportunities may emerge should markets punish bonds indiscriminately.

     

    Views expressed are as of July 15, 2022.