Historically, investors have looked to the bond markets to access higher quality fixed rate returns, either to supplement their yield or income goals or to help diversify away from traditional equity investments that often dominate portfolios. The growth and expansion of credit markets in recent decades has resulted in considerable growth in speculative-grade credit, now more commonly referred to as “high yield.” Once considered a more exotic and non-core bond asset class, high yield has now grown to serve an important strategic and tactical purpose within most investor portfolios, across the risk spectrum. .
This paper aims to provide the reader with a general overview of the high yield market, highlighting the strategic and tactical arguments for high yield investing, as well as addressing issues such as liquidity and technical characteristics of the market , the characteristics of the different segments of the high yield market, and how to think about the risks constituting high yield bonds. The main areas of focus of this document can be summarized into four main categories:
- Strategic allocations: What is the strategic risk and return of high yield within a portfolio, and what is a reasonable credit risk premium that high yield investors should charge?
- Features: What are the underlying characteristics of the high yield market, broken down by sector and quality? What is the impact of a change in allocation by sector or credit rating on risk and return characteristics?
- Market Timing: From a more tactical perspective, when has it historically made more sense to opportunistically overweight high yield as an asset class?
- Risks related to components: Between the credit spread and the risk-free yield of Treasuries, how did these constituent risks interact or contribute to the total risk of the asset class?