Why have high yield bonds proven so resilient?

High-yield bonds should be the most economically sensitive part of the fixed-income market because the companies that borrow in that part of the market are more likely to default, and weaker economic conditions increase the likelihood that more companies will default.

Meanwhile, higher interest rates are generally considered negative for high-yield bonds because the returns offered by lower-risk fixed-income assets rise, reducing the propensity for investors to own riskier assets.

But despite these apparent negatives, the asset class has proven resilient over the past three years, outperforming the traditionally lower risk class of UK government bonds, as table one below shows.

Jordan Lopez, head of the high yield strategy group at Payden and Rygel, said high yield bonds are a “short-duration” asset class, and thus one of the typical ways fixed income investors diversify, by owning different parts of the yield curve, is not available.