Bonds: High Yield

Pick your favorite recession signal and there is a chance it's flashing the warning signs. Most are eyeing the 2-to-10 year yield curve which inverted in early April. Investors worried about the recession should turn to high-yield bonds, but specifically, those ‘sin’ goods are the best remedy for the recession. Alcohol and Tobacco are two of the best performing industries in the 12-months leading to a recession and the years after. Food and beverage, utilities, and healthcare all are great performers as well. The high yield bonds to avoid are telecommunications and retail shopping, as their returns can vary drastically.


Finsum: Junk bond yields are relatively high right now and less sensitive to Fed moves, high yield bonds are a potentially good alternative right now.

If the treasury market isn’t upside down it’s certainly moving there. Yields are rising which means prices are falling. The worst part is with inflation picking up there is a lot of room to move in longer-term treasury bonds. So where should investors turn to? Fallen angel bonds and their associated funds. Fallen angels are investment-grade bonds that have been recently downgraded to junk status. The biggest benefactor is that these relatively riskier bonds have a way higher return but there is less interest rate pass-through. That means as the Fed begins to strangle the government bond market the lower-grade corporate bonds won’t feel much of the pain. Many of these corporations have relatively strong balance sheets and the risk is overblown, so profits can recover quickly.


FINSUM: The fallen angel fixed income ETF market has an incredible yield advantage, and there is so much fiscal and monetary support that the risk is probably smaller than the yields are saying.

The overall bond market is almost a bust this year but investors flocking for a yield can only go to one place, junk bonds. Lending conditions are very loose with all the accommodations both fiscal and monetary policy made this year, and those attempting to stream any income have to learn to high-yield debt. Inflation is eating up anything to be gained in treasuries. Investors are now treating high yield debt like a more liquid asset than ever purely because traditional bonds are losing to inflation. All of the policy measures have made many feel corporate debt is less risky than ever but the excess demand may be tipping, as even some of the riskiest debt is being sought after. Still high nominal economic growth is good for borrowers and reduces to investors.


FINSUM: Investors should be aware of interest rates pass-through from Fed tightening to corporate debt, strong inflation could lead to weaker pass through and even lower spreads than the market is already seeing.

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