In a low-interest-rate environment, high-yield bonds are living up to their names, generating substantial interest income, says Mark Hudoff, portfolio manager of Hotchkis & Wiley High Yield in Corona del Mar, Calif. Even after defaults, investors still earned above-market returns that beat investment grade, he said. Indeed, his fund has had a trailing 12-month yield of 5.4% over the past year, according to Morningstar.

Currently, he says, high-yield bond funds are earning roughly 4 percentage points above Treasuries, and defaults are just above 1%. While high yield defaults are on the rise--estimates call for a rate of 1.5% to 2% before the end of 2015--they are still well below the long-term average of about 4.4%. All of that makes high-yield an attractive option compared to investment-grade bonds. Even if the high-yield funds take some defaults, say for 50 basis points, they still can produce as much as three times the yield of investment-grade bonds. Income, while attractive, isn’t the only reason to consider high-yield bonds. They also have a very low correlation with Treasuries – an average of 0.4. Bonds rated single-B have an even weaker link to the Treasury market. Compare that to an almost one-to-one correlation between investment grade bonds and Treasuries, Hudoff says.

Register or login for access to this item and much more

All Bank Investment Consultant content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access