A bond allocation is like a railroad. Credit is the locomotive that generates high returns, duration the track that keeps the train in line. Take the track away and you risk running your portfolio into the ditch. That’s why duration-hedged credit strategies are dangerous.
High-yield investors bracing for a downturn in 2018 can relax. By some metrics, high-yield companies have rarely looked better. The way we see it, investors who do their homework can still profit in this environment.
Investors often say they’re worried about having too much high-yield bond exposure so late in the credit cycle. But many are still chasing returns in equities and other assets with even higher risk. We’ve got a better idea.
Market conditions may change in 2018, and that’s good for income-oriented investors. Yes, interest rates are rising and some assets look expensive. But there are still plenty of horses to ride in this race.
As 2018 approaches, investors may want to take some time to reexamine their high-income strategies. We’ve got some advice: Be selective. Be diversified. And, perhaps most importantly, be patient.
Tighter monetary policy in advanced economies. Stretched asset valuations. These are anxious times for income-oriented investors. But don’t worry—it’s still possible to generate income without taking on unnecessary risk.
High-yield bonds have had a good run. But with interest rates rising, has the market run out of road? Don’t bet on it. The sector usually motors ahead when rates rise. And when it does decline, it rebounds rapidly.
Bonds in the US high-yield market are as varied as the creatures in the sea. Invest carelessly, and you may get stung. But with careful analysis, investors can uncover gems at any stage of the credit cycle.
Should tighter monetary policy on both sides of the Atlantic worry bond investors? We don’t think so. Bonds have historically delivered positive returns when interest rates rise—particularly when they rise gradually.