Harnessing Income Opportunity in High Yield Credit

Key points

  • Opportunities in high yield: High yield credit offers the potential for higher income and lower interest rate exposure than other fixed income asset classes. A resilient US economy and company earnings outlook helps to offset fears of credit stress from higher financing costs, leading to a more benign default rate outlook.
  • A systematic approach to high yield credit: The iShares High Yield Systematic Bond ETF (HYDB) seeks to track an index seeking to outperform the broad high yield market by systematically managing credit risk and identifying issuers with attractive valuations.

Elevated all-in yields in high yield credit present an attractive opportunity for income-seeking investors to lock in higher levels of income. Of course, that comes with a much higher degree of risk as compared to sitting in cash. As a result, allocations to high yield in a portfolio context can be considered relative to both equity exposures (based on risk level) and cash and fixed income holdings (for income).

As compared to equity risk, high yield returns historically offer a degree of equity upside return capture with lower volatility and lower downside. But compared to fixed income risk, high yield has also exhibited lower interest rate sensitivity (Figure 1). High yield offers a combination of greater equity risk (and income) at the same time as it offers lower duration risk as compared to other fixed income alternatives.

Figure 1: High yield economic and interest rate risk vs. other fixed income assets

Monthly data since 1990