The Federal Reserve’s monetary tightening, geopolitical turmoil, and stubbornly high inflation has created an environment in which the potential risks for equities outweigh the potential rewards in the short to medium term. For investors seeking alternatives, a white paper issued by T. Rowe Price argues high yield bonds currently may offer a compelling yield advantage relative to equities.
In the paper, Tim Murray, a capital market strategist in T. Rowe Price’s multi-asset division, notes that a comparison against the forward equity earnings yield, which accounts for a company’s total earnings and not just the portion paid out in dividends, shows a significant yield advantage for global high yield. Plus, while equity earnings may be revised downward if the economy weakens, cash flows are unlikely to be impacted unless a company defaults.
And while credit risk is a valid concern, credit quality in the high yield universe has, on average, steadily improved since the end of the global financial crisis. Over the past 15 years, the share of high yield bond issuers in the Credit Suisse High Yield Index rated higher than single-B has risen to 59% from 37%.
Another potential advantage for high yield bond investors is that high yield sector fundamentals are generally stronger since 2008, with corporate balance sheets holding more cash and less leverage. While earnings are likely to fall in a recession, T. Rowe Price argues that healthy balance sheets could help reduce the risk of widespread defaults.
“In our view, financial markets face a challenging economic environment, with an increased likelihood of a global recession within the next year,” Murray wrote. “While our Asset Allocation Committee remains cautious and is maintaining a notable underweight allocation to equities, we believe that high yield bonds are supported by strong sector fundamentals and could offer relatively attractive yields.”
In October, T. Rowe Price launched the T. Rowe Price U.S. High Yield ETF (THYF ), the firm’s fourth actively managed fixed income exchange-traded fund. THYF seeks to provide total return and, secondarily, current income by investing primarily in U.S. dollar-denominated high yield corporate bonds and other fixed and floating-rate corporate securities.
Managed by the same investment team led by Kevin Loome and using the same process as the mutual fund T. Rowe Price U.S. High Yield Fund (TUHIX), THYF is designed to primarily provide a concentrated yet balanced portfolio focused on the traditional U.S. high yield bond investment opportunity set.
T. Rowe Price has been in the investing business for over 80 years, conducting field research firsthand with companies, utilizing risk management, and employing a team of experienced portfolio managers carrying an average of 22 years of experience.
For more news, information, and analysis, visit our Active ETF Channel.