asset allocation  |  august 6, 2020

The Search for Yield

High yield bonds could potentially offer investors compelling yields.


Key Points

  • In an uncertain environment with low interest rates, stock dividends are sparse and bond yields have plunged.

  • High yield bonds—which are supported by the rebound in oil prices and marked improvement in the quality of issuers—could offer compelling yields in our view.

Tim Murray, CFA

Capital Markets Strategist, Multi‑Asset Division

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

The left side chart shows yield comparisons (Yield % vs time period) for 15 years ended 6/30/20, on a monthly basis, of 10-year US Treasury Yield to Maturity (YTM) ending at .65, 10-year German bond yield to maturity ending at -.48, and S&P 500 forward dividend yield ending at 1.93. The right side chart shows the share of j.p. morgan u.s. high yield index rated BB or higher based on share of index (%) and time period from 2000 to 2020.

Past performance is no guarantee of future results.
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 provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of August 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.



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