Could bond investors find the next few months to be “the most wonderful time of the year?”
High-yield (or “junk”) bonds—along with the rest of the fixed-income market—have had a tough 2022. The Bloomberg U.S. Corporate High Yield index is down 10.7% year to date.
But history suggests that now may be a good time to show this asset class some holiday love. The reason: we are entering what has historically been some of the stronger months for high-yield bond performance. Since 2000, high-yield bonds have posted an average return in December of 1.3%—and 1.4% on average in January (see the chart).
Source: Bloomberg, Bloomberg U.S. Corporate High Yield Bond Index, 2000-2020 average monthly returns
In addition, recent developments may indicate potential emerging tactical opportunities among high-yield bonds. For example:
- Attractive yields. The index’s current average yield of 8.6% (as of 11/28/22) makes high-yield an area that income-focused investors may want to consider.
- Less interest rate risk. High-yield bonds generally have lower durations than many other types of fixed-income securities—so they’re generally less exposed to the volatility that often accompanies rising interest rates.
- Lower default risk. The cost of protection1 against negative events, as measured by credit default swaps (like bond issuers defaulting or going bankrupt), has fallen in recent months, from around 600 basis points to 470—suggesting that financial risk among high-yield bonds has diminished somewhat.
- Supply-demand dynamics. This year, the issuance of new high-yield bonds has been the lowest on record, according to Bloomberg. This lack of supply means it could take only a slight increase in demand for bond prices to move higher into year-end.
Of course, we all know that past performance is not indicative of future results. Seasonal trends and reinvesting signals don’t guarantee positive returns. However, a tactical approach to high-yield bonds may minimize downside risk if these recent positive trends reverse course.
The upshot: Investors may want to consider adding high-yield bonds to their wish lists this season.
1 As measured by the credit default swap index (CDX), a benchmark financial instrument made up of credit default swaps that have been issued by North American or emerging market companies.
Disclosure:
This commentary is written by Horizon Investments’ asset management team.
Past performance is not indicative of future results.
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