Why some investors are turning to high-yield bonds amid the volatility. Where to find opportunity
The fixed income market has recently seen some turbulence, but investors shouldn’t shun high-yield bonds — especially as they have been outperforming in recent years, according to asset management firm BondBloxx. All eyes have been on the Treasury market after yields jumped on Tuesday due to fears over inflation. The long-dated 30-year Treasury saw its rate top 5.19% for its highest level since July 2007, while the 10-year note yield hit levels not seen since January 2025. Yields tumbled Wednesday as oil prices moved lower. Bond yields move inversely to prices. Right now, there are better opportunities in high-yield bonds, especially amid the volatility, according to JoAnne Bianco, senior investment strategist at BondBloxx. “It probably seems counterintuitive, but they are less risky than long-dated Treasurys,” she said. “They’re lower in volatility, they’re better in return over pretty much every time period.” That lower volatility comes from the overall short duration in the space, making bonds less sensitive to interest rates, Bianco noted. Duration is a measure of a bond’s price sensitivity to fluctuations in interest rates. Bonds with longer maturities tend to have greater duration and thus see sharper price swings when rates move. HYSA YTD mountain BondBloxx USD High Yield Bond Sector Rotation ETF year to date Meanwhile, U.S. high yield has outperformed Treasurys, investment-grade corporates, mortgage-backed securities and asset-backed securities on an annualized basis for the past 10 years, she said. Bianco said that outperformance primarily comes from the coupon, which is the annual interest rate paid to the bondholder. Investors are paid to take on more risk compared to investment-grade assets. Improving quality within the high-yield market The high-yield market isn’t as risky as it once was. That has helped investor demand remain resilient, Wells Fargo Investment Institute said in an April 27 note. “The share of the riskiest bonds has declined meaningfully, while higher quality segments now make up a larger portion of the market,” said Tony Miano, the firm’s investment strategist analyst. “Importantly, many companies in high yield indexes are now larger based on market cap and more profitable,” he added. “The yield difference is narrow enough to incentivize some borrowers to remain at the high end of high yield (rated BB), rather than cross into the lowest tier of investment grade.” USHY YTD mountain iShares Broad USD High Yield Corporate Bond ETF year to date This earnings season was also good for companies in the space, with more beating consensus estimates than those who missed, BondBloxx’s Bianco said. There was also a higher level of positive to neutral forward guidance, she added. Companies’ multi-year focus on refinancing debt that started since the pandemic also underpins the strength of the high-yield market, Bianco said. BlackRock’s Rick Rieder is among those who also see opportunity in high-yield bonds . “The high-yield market, particularly the U.S. high-yield market, is a good core hold,” he recently told CNBC. The technicals are good and defaults won’t be high, said Rieder, the firm’s chief investment officer of global fixed income. For Jason Bloom, head of fixed income and alternatives ETF product strategy at Invesco, it is an opportunity that has been underestimated by investors. “It’s time to wake up to the fact that we’re in the midst of the largest capital investment spree in human history, and we’re two years into a five-year spend,” he said. “You can get negative around rising inflation, but you can’t really be negative around growth at the macro level.” Finding opportunities Bloom said he likes durations of fewer than five years in high-yield bonds. He also likes bank loans , which typically have floating interest rates tied to the secured overnight financing rate . BKLN YTD mountain Invesco Senior Loan ETF year to date Investors can also take advantage of dislocations within the market, said Bloom. For instance, some tech companies building out artificial intelligence infrastructure are rushing to issue bonds and not taking the time to negotiate more competitive terms so they can keep their schedules on track, he said. “It doesn’t mean that it’s a bad credit,” Bloom said. “At the end of the day, the spending is supported by the balance sheets of some of the strongest tech companies in America.” That said, the high-yield market is idiosyncratic, so investors should be selective, said BlackRock’s Rieder. With spreads tight in the BB market, B-rated bonds are the “sweet spot,” he said. Tight credit spreads mean investors are generally getting less compensation for taking on credit risk. However, BondBloxx’s Bianco isn’t concerned about those spreads, noting how strong the companies’ earnings and forward guidance have been. The BondBloxx USD High Yield Bond Sector Rotation ETF (HYSA) is currently overweight B and CCC exposure, Bianco said. Rating agencies consider CCC-rated bonds a very high credit risk. The fund is underweight BB exposure as the team feels there is less upside to be had, she noted. Investors should think of high-yield bonds as an enhancement to their portfolios, making up about 10% or 15% of their fixed-income allocation, Bianco suggested. Be aware of the bonds’ risk characteristics, as they will trade more like equities, she said. “Because of the resilient U.S. economy, because of how strong I feel like the high-yield market is, it translates into opportunity all the way down to the CCC level,” Bianco said.
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