Fund Spy

High-Flying High Yield, for Now

Brian Moriarty

High-yield bond funds are in the news once more given this year’s terrific performance run. From Jan. 1, 2019, through May 29, 2019, the high-yield bond Morningstar Category posted a 7.3% median return, while the ICE Bank of America-Merrill Lynch U.S. High Yield Index returned 7.8%. For comparison, the Bloomberg Barclays U.S. Aggregate Bond Index--the common proxy for investment-grade intermediate-term bond funds--returned 4.3% over the same period.

This rally stands in stark contrast to the sharp sell-off in the fourth quarter of 2018, which was driven by the Fed’s decision to continue raising rates, along with ongoing concerns regarding the trade negotiations between the United States and China. While the sell-off began in the equity markets, it eventually spilled over into the credit markets, particularly in the month of December. From October through December, the high-yield bond category lost 4.4%, nearly half of that coming in December alone. From Oct. 1, 2018, high-yield spreads (the difference in yield between high-yield bonds and U.S. Treasuries) widened from 322 basis points out to 544 basis points on Jan. 3, 2019.

Brian Moriarty does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.