High-Yield Quality Control

, Senior Fixed Income Strategist; and Josh Shapiro, CFA, Quantitative Strategist
One of the more noteworthy stories in the U.S. fixed income arena as 2018 came to a close was the visible reversal in fortune for the high-yield (HY) corporate bond market. Not coincidentally, this underperformance came at the same time the U.S. stock market was experiencing its own bout of selling pressure. "Risk-off" took hold across a spectrum of financial assets. What does this mean for the bond market in 2019? Investors should focus on credit quality control in their HY exposures.
A Look Back at the High-Yield Market Before looking forward, let's take a quick look back at the HY market. As the third quarter of 2018 was drawing to a close, the HY sector was the best-performing asset class within fixed income, posting a year-to-date return of a little over +2.5% (Bloomberg Barclays U.S. Corporate High Yield Total Return Index Value Unhedged). While this figure may not seem impressive given the prior two years' performances, it was still the positive outlier for fixed income. As you're aware, the final three months of 2018 were not kind to the HY market, and as of this writing, the year-to-date return was completely reversed and posted a negative reading of -2.08%.
For 2019, we envision HY outperforming investment-grade (IG) bonds within the credit spectrum, but there seems to be little doubt that investors will need to be more discerning when it comes to their... Read more