Latest Rate Hike Serves as High Yield Tailwind
The Federal Reserve’s recent rate hike is contributing to an environment in which high yield bond funds have become increasingly attractive to investors.
The Fed raised interest rates by 25 basis points on Wednesday. This latest rate hike — the Fed’s ninth in the past year — raises the target range for the federal funds rate to 4.75% and 5%. The Fed has also indicated that interest rates will rise to 5.1% by the end of the year.
In a press briefing on Wednesday, Fed Chair Jerome Powell said that while inflation “has moderated somewhat since the middle of last year,” inflation is “well above” the Fed’s “long-term target of 2%.”
“The process of bringing inflation back to 2% has a long way to go and will likely be bumpy,” Powell added.
have media companies pointed out that changes in the Fed’s policy statement after the meeting suggest that regular rate hikes may be easing. The US Federal Reserve added a line to its statement that the FOMC had been expecting “continued hikes” in the federal funds rate for months. The line was excised from the committee’s final statement after the meeting. Instead, the statement said, “Some additional policy tightening may be appropriate” and that the FOMC will “closely monitor incoming information and assess policy implications.”
A favorable environment for high yields
Not only has the Fed’s recent rate hike helped make high-yield bond funds more attractive to investors, but stronger fundamentals, lower bond issuance and low default rates have given the asset class an additional tailwind. Yields for so-called “junk bonds” measured by the ICE BofA US High Yield Index stands at 8.72% on March 21, up from 5.95% a year earlier.
See more: Chart of the Week: Advisors wanting to understand credit risk in high yield bonds
Consultants are increasingly sought after to learn more about high-yield fixed income securities – and more specifically about the risk inherent in the asset class.
“We’re seeing sentiment towards high yield has improved over the past month as more advisors want to learn more about these funds and plan to increase exposure rather than decrease,” said Todd Rosenbluth, research director at VettaFi.
Investors who want the reward of high returns with less risk should consider this Donoghue Forlines Tactical High Yield ETF (DFHY). The Fund seeks exposure to the high yield bond market, which generally offers high coupon rates in order to potentially generate a high level of current income. It does this by attempting to provide investment results that reflect the performance of the FCF Tactical High Yield Index.
DFHY aims to capture most of the upside and avoid most of the downside of the high yield asset class during a full credit market cycle. It uses defensive tactical indicators to mitigate downside volatility and preserve capital, switching primarily to medium-term Treasury exposures on market declines.
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