The specter of rising interest rates has taken a toll on the bond market in 2013, but demand for high yield bond funds remains elevated as investors continue to look for an alternative to low-yielding Treasuries and volatile stocks. In fact, sales of individual high yield bonds are on pace to surpass 2012’s record. So far this year iShares Boxx High Yield Corporate Bond (HYG), a $15.5 billion ETF, has climbed nearly 6% in a period where investment grade bond funds, tax-free bond funds and international bond funds have come under pressure and are sitting on losses.
High yield bond funds owe their resilience year-to-date to a low level of interest rate sensitivity. A study conducted in the mid-2000s attempted to quantify this characteristic and found that only 3% of a high yield bond’s price variation could be explained by interest rates while 24% of price movement was influenced by the direction of equity markets. In other words, high yield bonds actually behave more like stocks than bonds. In May I blogged about a recent Barclays study that looked at periods when 10-year Treasury yields rose 100 basis points or more. Barclays found there had been 13 such times in the past 30 years and that high yield bonds outperformed investment grade bonds 12 times.
I’ve managed a High Yield Bond Portfolio for over 20 years for clients interested in leveraging the high yield bond market’s unique performance characteristics to diversify their portfolios. I move their investments to US Treasuries or cash when high yield bond risk is elevated. Between 1992 and 2012 the program’s returned 8.5% annually compounded, after fees, with only small losses along the way. If you’re interested in trading high yield bonds yourself, check out my newsletter – I supply general buy/sell signals for US high yield bond funds, along with a weekly list of top monitored funds/ETFs based on price momentum.
♦ Please note that my readings will change without notice, so please don’t buy or sell solely based on anything you read in this blog. ♦