All articles tagged with #high yield bonds
Amid record-high stock markets and eroding economic confidence, analysts suggest reallocating some investments into high-yield bonds, which historically outperform stocks during low-growth periods and offer lower volatility, potentially reducing overall portfolio risk while maintaining returns. However, risks include potential recession impacts and underperformance if the economy accelerates unexpectedly.
Despite the S&P 500's impressive rally, economist David Rosenberg highlights three concerning signs in the market: the lack of confirmation from the Dow Jones Transportation Average, underperformance of high-yield bonds and volatile stocks, and signs of exhaustion in the tech-led rally. These "yellow flags" raise questions about the sustainability of the current market rally and suggest potential vulnerability and risk of a reversal.
Bank of America has warned that the US could experience a $46 billion wave of distressed high-yield debt in 2024 as defaults accelerate. The bank predicts that defaults could increase at a pace 1.5 times faster next year due to higher interest rates. The technology, media, and telecom sectors are expected to see the most defaults, followed by the health and cable sectors. Experts have also warned of a wave of bankruptcies and defaults, with Fitch Ratings estimating a high-yield bond default rate of 4.5% to 5% by the end of this year and Charles Schwab predicting a peak in total US bankruptcies and debt defaults in early 2024.
Improved credit quality, expectations for a mild recession or soft economic landing, and current valuation discounts make it a good time to invest in high-yield bonds, also known as junk bonds, which are riskier but pay higher interest rates. Investors who focus on this space now may see excellent performance over the next few years, especially if interest rates decline.