High Yield in a Rising Rate Environment: A Perspective on Historical Performance
By: Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD)
We spoke last week about some of the reasons high yield bonds have historically performed well in rising rate environments, including the following:
- Higher coupons and yields in the high yield space help cushion the impact of rising interest rates.
- High yield bonds have shorter durations than other asset classes in the fixed income space.
- The prices of high yield bonds have historically been much more linked to credit quality than to interest rates.
- High yield bonds are negatively correlated with Treasuries.
Now let’s look at some actual numbers as to how high yield has historically performed in a rising rate environment. Since 1980, Treasury yields have increased (i.e., interest rates rose), in 15 of those years. In every one of those years, high yield has outperformed the investment grade market. The long-term numbers show that over those 15 years since 1980 where we saw Treasury yield increases (i.e., interest rates rose), high yield had an average return of 13.7% (or 10.4% if you exclude the massive performance in 2009). This compares to only a 4.5% average return (or 3.6% excluding 2009) for investment grade bonds over the same period.1
So the data is clear that high yield has historically not only provided investors with solid returns during periods of rising interest rates, but has also dramatically out performed its investment grade counterpart. While we do not expect to see a rapid rise in rates (again see our article from last week for our take on rates), we do believe that the high market provides a compelling fixed income opportunity for those concerned about rising rates.
1 Data sourced from: Acciavatti, Peter Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “2008 High Yield-Annual Review,” J.P. Morgan North American High Yield Research, December 2008, p. 113. “High-Yield Market Monitor,” J.P. Morgan, January 5, 2009, January 5, 2010, January 3, 2011, January 3, 2012, January 2, 2013 and January 2, 2014. 2008-2012 Treasury data sourced from Bloomberg (US Generic Govt 5 Yr), 2013 data from the Federal Reserve website. The J.P. Morgan High Yield bond index is designed to mirror the investible universe of US dollar high-yield corporate debt market, including domestic and international issues. The J.P. Morgan Investment Grade Corporate bond index represents the investment grade US dollar denominated corporate bond market, focusing on bullet maturities paying a non-zero coupon.