Although rising interest rates have eroded investor confidence, some US corporate high yield bonds are giving yields of around 8.5%, presenting an attractive proposition for investors, as per Insight Investment. In an insight published by the investment management firm, it debunks three myths that are holding off on investments into the asset class.  

The first myth is high default rates. Insights Investment says that default rates on US high yield hit 4% or higher during a financial crisis like the ones witnessed during the start of the pandemic in March 2020 or the 2008 housing crisis. The asset manager says that barring such an extreme scenario, the default rates are far less than what the investors are used to hearing from rating agencies. 

Citing data tracked by the Bloomberg US High Yield Corporate Index, the investment management firm says that default rates have averaged 1.5% between 2005 and 2022. 

The second myth is that US corporate high yield bonds are vulnerable to rising interest rates. “High yield has less interest rate (or ‘duration’) risk than government or investment grade bonds, as high yield tends to be shorter-dated on average,” claims Insight Investment.  

From July 2005 to October 2022, average high yield returns have been close to 13%, says the asset manager.  

The third misconception is that when it comes to high yield bonds, it is difficult for investors to obtain liquidity. Insight says that specialists can access ‘hidden liquidity’ from the ETF ecosystem. 

“After the 2008 crisis, the fixed income ETF market developed rapidly, providing a new source of bond market liquidity…In our view, this type of trading can help investors target alpha within smaller and traditionally less liquid issuers,” writes Insight Investment in its report.  

In conclusion, the asset manager believes that investors should watch out for US corporate high-yield bonds over the next year especially after last year’s repricing ensures a high yield for investors.  

View the full insight here.