The US high-yield bond market has an impressive record when it comes to recovering drawdowns quickly. But how much can an investor who stays put reasonably expect to earn? Today’s yield should give them a pretty good idea.
History has shown that the yield you start with is a remarkably reliable indicator of what you can expect to earn over the next five years. This has held true even during the market’s most stressful and volatile periods. An investor who bought on the eve of the global financial crisis—as it turned out, one of the most inauspicious times to have entered the market—and held her position through the downturn and the great recession that followed still earned a five-year annualized return of 7.7%.
How is this possible? Remember that high-yield bonds provide a consistent income stream that few other assets can match. And many issuers typically call their bonds before they mature—and pay a premium to bondholders for the privilege. This helps make up for losses suffered on bonds that default.
Downturns are a fact of life in markets, and high-yield bonds are likely to face some more rough patches this year. But the way we see it, that’s no reason to avoid the market’s high income potential.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.