The Search for Yield

Timothy C. Murray, Capital Markets Strategist

Key Insights

  • In an uncertain environment with low interest rates, stock dividends are sparse and bond yields have plunged.
  • High yield bonds—supported by the rebound in oil prices and marked improvement in the quality of issuers—could offer compelling yields in our view.

Recently, equity markets have moved sideways, and until a widely distributed vaccine for the coronavirus is available, we believe that the U.S. faces a slow economic recovery. In this environment, investors seeking consistent yield in their portfolios may want to consider high yield bonds.

As outlined in the yield comparisons chart below, yield has become scarce in recent months. Government bond yields have plunged as interest rates have remained extremely low, and stocks also have offered relatively meager dividend yields— with many companies forced to suspend dividend payments due to uncertainty. High yield bonds, on the other hand, may offer investors compelling yields in our view.

It is important to note that the potential to earn higher yields comes with higher risk. The sharp decline in economic activity means the probability of default is higher than normal. Several high yield issuers have already experienced downgrades. However, we believe that there are reasons for optimism.

Although oil prices are still below pre-crisis levels, the rebound since April has benefited high yield bonds, given that the energy sector represents a substantial portion of the market. The gradual reopening of global economies and drastic production cuts have sharply improved the supply/demand dynamics of the oil market, which could be supportive near term. Further, the overall quality of high yield issuers has improved meaningfully over the past two decades, as the number of issues rated BB or better—one notch below investment grade—has notably increased.

Despite the risk of default, some companies will be able to manage through the economic crisis better than others. With strong security selection, active managers could help mitigate potential risks and offer additional value for high yield investors.

Opportunities in High Yield
A good yield is hard to find

Past performance is not a reliable indicator of future performance.
Sources: J.P. Morgan and Standard & Poor’s (see Additional Disclosures). T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.


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Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2020, J.P. Morgan Chase & Co. All rights reserved.

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Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

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202008‑1289769

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