A Quiet First Half for the High-Yield Market

Brian Moriarty: The high-yield market hasn't received much media attention this year, but that makes it the perfect time to review the category. From January through May, the median high-yield bond fund lost about 40 basis points, roughly on par with the 30-basis point loss of the category benchmark.

But that hides some of the nuance: Roughly a third of the category actually has positive returns year to date. These top performers all share one of two strategies in common: Either they have a short duration approach, or they are known for taking on a lot of credit risk, especially in the CCC part of the market. Both approaches reduce the risk of rising interest rates, which as we know has been the story this year in the bond market. Lagging funds include those that take on a lot of interest-rate risk, have a high level of BB holdings, or have a global mandate.

Meanwhile, high-yield bond issuance is actually down about 30% relative to last year, as companies continue to turn to the bank-loan market for their financing needs. Less supply should be supportive of prices in the near term. On the other hand, there has been an explosion of growth in the BBB part of the investment-grade market. This has investors nervous, because a wave of downgrades would flood the high-yield market and put downward pressure on prices.

So while the high-yield market has been a relatively quiet recently, developments in both the investment-grade market and bank-loan market could have a significant impact on high-yield investors in the coming years.