The bond market is continuing to rally through the first month of 2023, reinvigorating investor confidence in even the riskiest of debt like high yield bonds. While that market is attractive, investors should still proceed with caution.
Investors should certainly be cautious in the first place when it comes to high yield bonds; given that there are still unknowns in 2023 and beyond, the caution is warranted. The overall expectation is that the bond market will bounce back, but it’s still better to be safe than sorry.
“The good news: high yield bonds have never had two negative years in a row," said Kyle Kloc, a senior portfolio manager at Fisch Asset Management in a Financial Times Adviser article. "Although we do not expect a huge rebound after an almost unprecedentedly weak 2022, we are cautiously optimistic that the historic pattern will remain in place in 2023.”
All eyes will certainly be on the Fed with respect to interest rate policy. Capital markets are expecting the Fed to decelerate the pace of rate hikes, which should feed into high yield strength.
“With interest rates at a more ‘reasonable’ level, monetary policy should help the high yield market to gradually move away from the conditions of the last 15 years, and back to those seen before the global financial crisis, resulting in a positive performance this year,” Kloc added.
Add Discerning High Yield in Corporate Debt
Given the potential headwinds the economy still faces with inflation and interest rates, investors who want to add high yield debt exposure need a discerning screener to find value-added options. Consider an exchange traded fund (ETF) to get convenient exposure: in particular, the Xtrackers USD High Yield Corporate Bond ETF (HYLB ).
HYLB, with its low net expense ratio of 0.15%, seeks investment results that correspond to the performance of the Solactive USD High Yield Corporates Total Market Index. The index is a rules-based, market value-weighted index engineered to mirror the performance of high yield-rated corporate bonds issued in U.S. dollars.
Having a discerning screener in corporate bonds is especially important. In a market environment where high inflation exists, this could eat into corporate profits, so a rules-based approach focused on extracting yield while adding diversification across various corporate debt in different countries is almost imperative — HYLB can accomplish this.
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