As a high yield manager, we have recently heard a number of people saying (we believe incorrectly) that our market is set up for doom if rates rise.  Rather, history would indicate quite the contrary.  Looking back to 1980, we have seen 15 calendar years in which increase rates increased (here measured by an increase in the yield on the 5-year Treasury), and here is how various asset classes have performed during those 15 annual periods:¹

The long-term numbers show that over those 15 years since 1980 where we saw Treasury yield increases (i.e., interest rates rose), high yield bonds had an average return of 13.6%.  This compares to only a 4.4% average return for investment grade bonds and 2.3% for municipal bonds over the same period, both of which are more interest rate sensitive (higher duration) asset classes.  Equities also posted a strong return over the periods of rising rates, yet while we haven’t seen much of a correction in the equity markets over the past month or so on the higher rate concern, we have seen the high yield bond market impacted and outflows from the asset class.

It seems the data is clear that high yield bonds have historically not only provided investors with solid returns during these annual periods of rising interest rates, but has also outperformed more duration sensitive asset classes like investment grade and municipal bonds over these periods.  We believe that investors concerned about the impact of rising rates on fixed income markets should be more concerned with these higher duration asset classes.  Further, we believe that the misperceptions out there that higher rates spell doom for the high yield market and the reaction we have seen in many selling the asset class may create a better entry point for those who understand the historical data and are willing to embrace this market.

For more on how the high yield bond market has historically performed during periods of rate increases and various strategies for investing during periods of rising rates, see our piece “Strategies for Investing in a Rising Rate Environment.”

1 High yield and investment grade data sourced from: Acciavatti, Peter Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li.  “2008 High Yield-Annual Review,” J.P. Morgan North American High Yield Research, December 2008, p. 113; “High-Yield Market Monitor,” J.P. Morgan, January 5, 2015, p. 3; and “2014 High-Yield Annual Review,” J.P. Morgan, December 29, 2014, p. 292. Treasury data sourced from Bloomberg (US Generic Govt 5 Yr).  The J.P. Morgan High Yield bond index is designed to mirror the investible universe of US dollar high-yield corporate debt market, including domestic and international issues.  The J.P. Morgan Investment Grade Corporate bond index represents the investment grade US dollar denominated corporate bond market, focusing on bullet maturities paying a non-zero coupon.  S&P 500 data sourced from Bloomberg. Barclays Municipal Bond Index covers the long-term, tax-exempt bond market (source Barclays Capital).