Stable Income Opportunities in High-Yield Debt

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Money flowing out of wallet

Fixed-Income Funds

Stable Income Opportunities in High-Yield Debt

Bob Ciura Sep 25, 2015

Rising Asset Prices, Falling Yields

And high-yield bond funds have enjoyed robust inflows since investors are attracted to the high yields in a low-rate environment. To that end, net high-yield bond inflows totaled $236 million in the week ended September 16, according to Lipper. That was a significant increase from a $185 million net inflow the previous week.

Why High-Yield Bond Funds Are Attractive

Moreover, bond funds are an optimal choice over selecting individual fixed-income securities as a means of diversification. Owning a basket of bonds is a great way to spread risk around. This is especially true for bonds that are not investment grade as the individual issuances involve a higher level of risk than a diversified mutual fund.

Another advantage of investing in high-yield funds is that corporate balance sheets are healthy. Cash levels are rising, as are corporate profits, thanks largely to the steady global economic recovery in the past several years. This has led to reduced levels of corporate defaults, even among riskier issuers. Defaults are well below the long-term averages. According to Fitch Ratings, U.S. corporate bond defaults remain at a relatively low 2.9%.

The Bottom Line

In response, investors have flocked to high-yield funds. These funds offer the benefit of diversification which helps reduce risk. And corporate defaults remain low. If the U.S. economy continues to improve, and corporate profits continue to rise at a modest pace, defaults should continue to remain low. That should keep the relatively strong yields of high-yield bond funds attractive for income investors.

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