Over the past seven years or so, high yield investors have been handsomely rewarded. Since the depths of the financial crisis in 2008, only the U.S. stock market has outperformed high yield among a large basket of various asset classes, and the high yield market achieved its performance with far less volatility.
But after such a strong stretch, investors may now be wondering what’s next. The U.S. economy is on the mend, the Federal Reserve has ended its quantitative easing (QE) program, and interest rates may be poised to move higher later this year. Meanwhile, oil prices continue to be volatile, and the global economy (excluding the U.S.) looks less than healthy. With all of that to think about, BlackRock’s Jim Keenan and Leland Hart offer their outlooks for the balance of 2015 and weigh in on some of the key considerations for high yield bond and bank loan investors.
- High yield bonds and loans combine characteristics of both fixed income and equity, so returns are more correlated to equity than traditional fixed income. Over time, those characteristics tend to offer a risk-return profile that can make them attractive as a strategic portfolio allocation.
- High yield companies are in good financial shape, with improving cash flow putting these companies in a better position to pay off their debt.
- In a rising interest rate environment, high yield and loans historically have outperformed.