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Alternative Market Briefing

High Yield: Equity-Like Returns... With Half the Risk? (white paper)

Wednesday, February 01, 2017

Matthias Knab, Opalesque:

AllianceBernstein writes in Harvest Exchange:

Investors often think of high-yield bonds as just another part of their fixed-income allocation. And when investors seek to reduce equity volatility, they typically shift assets to areas of the fixed-income universe with more stability, such as investment-grade bonds. But they may not realize that high yield offers strong risk-adjusted return potential and a low correlation to interest-rate-sensitive investments. That may argue for giving high yield its own seat at the asset-allocation table.

THE CASE FOR HIGH YIELD

Today's fixed-income landscape features a dizzying array of securities, from US Treasury bills to corporate bonds, and from asset-backed securities to catastrophe-linked bonds. On the surface, high-yield bonds seem a lot like their fixed-income relatives: they represent loans from investors to an entity, they make regular coupon payments and they commit to repay investors in full on a specific maturity date.

So, it's not surprising that investors tend to think of high yield as part of their bond allocations. Because high yield is one of the riskiest fixed-income sectors, many investors adjust their high-yield allocations to raise or lower the overall risk in the fixed-income component of their portfolios.

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