How tightening monetary policy is affecting high-yield bonds

US Federal Reserve

The time series analysis shows that the prices of high-yield securities have generally fallen less than those of government securities when yields are rising.

(Photo: dpa)

Frankfurt High yield bonds offer better performance relative to government bonds when the Federal Reserve (Fed) tightens the reins. This is shown by current evaluations of earlier developments by Goldman Sachs and HQ Trust.

After that, the prices of high-yield securities have generally fallen less than those of government securities when yields have risen. “In the past three decades, there have been three cycles of rising interest rates,” writes Goldman. “All had their quirks, but in each case, total returns on US high-yield corporate bonds have proven relatively resilient to rising yields.”

The most important reason is that the high interest rates partially compensate for price losses. It is also sometimes argued that tighter monetary policy is often combined with an improving economy and therefore lower default rates. This is leading to a reduction in risk premiums on corporate bond yields compared to government bonds. When this happens, the fall in price is slowed down because yields and prices move in opposite directions.

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