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High Yield Bonds: Go Short for Higher Yields

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Today’s inverted yield curve for high-yield bonds means potentially higher returns for less risk.

Bond investors have come to expect that longer maturities bring higher yields. In other words, taking on extra risks requires greater compensation. 

Currently, short-term U.S. high-yield bonds are actually yielding more than long-term ones—an environment known as an inverted yield curve. You’re getting paid more for taking on less risk. It’s an enticing proposition for yield-oriented investors.

In U.S. high yield, short-duration bonds are yielding more than long ones
Yields by maturity
In U.S. high yield, short-duration bonds are yielding more than long ones

As of 04/30/24. Source: FactSet. See below for index associations and other index information

 

A note about risk 

Debt instruments: Debt instruments are subject to greater levels of credit and liquidity risk, may be speculative, and may decline in value due to changes in interest rates or an issuer’s or counterparty’s deterioration or default. High yield fixed income securities: There is a greater risk of issuer default, less liquidity, and increased price volatility related to high yield securities than investment grade securities. Market volatility: The value of the securities in the portfolio may go up or down in response to the prospects of individual companies and/or general economic conditions. Price changes may be short or long term. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a significant impact on the portfolio and its investments, including hampering the ability of the portfolio’s manager(s) to invest the portfolio’s assets as intended. Issuer risk: The portfolio will be affected by factors specific to the issuers of securities and other instruments in which the portfolio invests, including actual or perceived changes in the financial condition or business prospects of such issuers. Interest rate risk: The values of debt instruments may rise or fall in response to changes in interest rates, and this risk may be enhanced for securities with longer maturities. Credit risk: If the issuer of a debt instrument fails to pay interest or principal in a timely manner, or negative perceptions exist in the market of the issuer’s ability to make such payments, the price of the security may decline.

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Past performance does not guarantee future results. This market insight has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain statements contained herein may represent future expectations or other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults, (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors. Index associations: 1–3 year U.S. high yield: ICE BofA 1-3 Year U.S. Cash Pay High Yield Index; 3–5 year U.S. high yield: ICE BofA 3-5 Year U.S. Cash Pay High Yield Index; 5–7 year U.S. high yield: ICE BofA 5-7 Year U.S. Cash Pay High Yield Index; 7–10 year U.S. high yield: ICE BofA 7-10 Year U.S. Cash Pay High Yield Index. The ICE BofA U.S. High Yield Index is a market value–weighted index consisting of USD-denominated, non–investment grade bonds not currently in default. An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. Index comparisons have limitations, as volatility and other characteristics may differ from a particular investment.

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