Higher Yields Brighten the Outlook for High-Yield Bond Returns

After a long stretch of paltry yields, many high-yield bonds are now offering attractive income payouts. That may be good news for income-oriented investors, not only because it helps support a healthy income stream but also because history suggests that higher yields can contribute to healthy future total returns.

The chart below shows the effective yield and the subsequent five-year total return of the ICE BofA US High Yield Bond Index. Notably, five-year returns have historically closely tracked the effective yield. That’s not particularly surprising since income payouts account for the majority of the returns generated by high-yield bonds. The index finished 2023 with an effective yield of 7.39%, which suggests a potentially brighter future for high-yield bonds.

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

Given this backdrop, we believe that now could be an attractive time to add or top up your clients’ high-yield bond allocations, particularly those clients focused on income. For more information, please access our website at www.harborcapital.com or contact us at 1-866-313-5549.

Important Information

For Institutional Investor use only.

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.

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.

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. This unmanaged index does not reflect fees and expenses and is not available for direct investment.

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