Current Interest Rate Environment Could Favor High Yield

Within today’s uncertain market landscape, we believe it is important that investors maintain portfolio diversification. High-yield bonds have a role to play in a diversified portfolio, in our view. They can be particularly attractive to income-oriented investors and may also potentially serve as an equity substitute for investors seeking to reduce portfolio volatility for the road ahead.

If history is any guide, the current interest rate environment may be favorable for high-yield bonds. Data shows that high-yield bonds have exhibited performance strength when short rates remained elevated above 5%, as well as during 3-year and 5-year periods following short rate peaks above 5%. The chart that follows plots the yield on the US 3-month Treasury Bill over the last 30 years ending 12/31/2023. The tables show the performance of high-yield bonds in periods where T-Bills remained elevated or following >5% peaks. As you can see, high-yield bonds put up solid longterm results during these periods. Importantly, the period from February 2007 through February 2012 included 2009 when default rates were high, showing that high yield was able to outperform, even in a period of heightened credit risk.

Source: FactSet, Morningstar Direct
Performance data shown represents past performance and is no guarantee of future results.

In our view, this provides a compelling case for high-yield bonds relative to short-term T-bills moving forward.

It is important to acknowledge that high-yield bonds are not without risk, and the key to outperformance, in our view, is to avoid the riskiest issuers. From our perspective, that’s one important reason to favor active managers over passive strategies in this asset class. Many passive fund indices rule-based approaches may not allow for the flexibility required to optimally manage risk. For instance, many mainstream indices favor more indebted issuers. In contrast, active managers have the flexibility to avoid troublesome creditors, and by closely monitoring portfolio holdings, active managers can strive to eliminate weakening issuers long before they are dropped from index frameworks.

For more information, please access our website at www.harborcapital.com or contact us at 1-866-313-5549.

Important Information

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a recommendation to purchase or sell a particular security.

Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.

Fixed income investments are affected by interest rate changes, changes in the market conditions and the creditworthiness of the issues held. As interest rates rise, the values of fixed income securities held are likely to decrease and reduce the value of a portfolio.

There is a greater risk of loss when investing in below- investment grade fixed income securities and unrated securities of similar credit quality (commonly referred to as “high-yield securities” or “junk bonds”) "High-yield" or "junk bond" securities are considered speculative because they have a higher risk of issuer default, are subject to greater price volatility and may be illiquid.

Diversification does not assure a profit or protect against loss in a declining market.

The ICE BofA US High Yield Index (H0A0) Index is an unmanaged index that tracks the performance of below investment grade U.S. Dollar-denominated corporate bonds publicly issued in the U.S. domestic market. All bonds are U.S. dollar denominated and rated Split BBB and below. The ICE BofA 3 Month U.S. Treasury Index measures the performance of U.S. dollar denominated U.S. Treasury Bills. These unmanaged indices do not reflect fees and expenses and are not available for direct investment.

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