What Might Rising Rates Mean For High Yield Bonds?

Posted by Scott Roberts, Head of High Yield and Shawn Pope, Quantitative and Factor Analyst on May 25, 2018, in Fixed Income

US interest rates have defied market expectations in recent years, staying historically low despite solid economic growth. But in the last year, and especially the last few months, rates have started to climb. The 2-year Treasury currently yields 2.58% compared to 1.92% at the start of the year and 1.31% a year ago.1 The 10-year Treasury yield has breached 3.0% in recent days, compared to 2.46% at the start of the year and 2.34% a year ago.1 What do these rate moves mean for high yield investors?
High yield has done well during periods of rising rates High yield bonds performed well in the last rate-hiking cycle in the mid-2000s, and we at Invesco Fixed Income expect similar performance in the current cycle (Figure 1).
Figure 1: High yield vs. equities, leveraged loans, and investment grade bonds
High yield performed well during the rate hikes of the mid-2000s

Sources: StyleADVISOR, Bloomberg L.P. An investment cannot be made directly in an index. Past performance does not guarantee future results. LHS = left-hand side.
Looking further back, there have been 17 quarters since 1987 when yields on the 5-year Treasury note rose by 70 basis points or more (Figure 2). In 11 of those quarters, high yield bonds demonstrated positive returns. In the six quarters when high yield bond returns were negative (highlighted in pink), the... Read more