"Will rising rates hurt high yield bonds?"   
This fixed income question comes up more than any other. It's an excellent question. With global fixed income yields at record lows, that (theoretically) can go nowhere but up, can high yield bonds continue to work effectively inside portfolios?

We decided to do a deep data dive and find out how high yield bonds have performed historically during a rising rate environment. Specifically, what happened historically when long-term government bond yields rose significantly? The results may surprise you.
 
Let's go to the charts

Looking at 12-month rolling periods of monthly performance data over the past 90 years (since 1926), we searched for times when long-term U.S. Government Bonds got hammered, pushing yields up and bond prices down. We used a drawdown (peak-to-trough drop) threshold of > -7.5% for long-term U.S. Government bond funds and then did a side-by-side comparison versus high yield bond funds. We were pleasantly surprised to see high yield bond funds outperformed during periods of rising long-term rates.


(Source: Morningstar)
 
High yield bonds outperformed U.S. Government bond funds every single time!

This next chart shows those same > -7.5% drops for U.S. Government bonds only this time, we subtracted the Government bond performance from high yield bond performance. What you see in the chart is high yield bonds beating Government bonds 100% of the time! In other words, every single time during the past 90 years that Government bonds had a 12-month rolling period drop of > -7.5%, high yield bonds outperformed.
 
(Source: Morningstar)
 
Why? Because high yield bond prices are not correlated to Government bond prices. Historically, when long-term government bond prices fall (and rates rise), it doesn't necessarily mean that high yield bond prices will fall too (causing high yield bond yields to rise). And when they have, historically, 100% of the time it was much less traumatic for high yield bond funds than it was for government bond funds.
 
What does this mean for Optimus Tactical High Yield?

With all the worry about rising rates it's good to know that historically, high yield bonds have weathered rising rate environments very well. But, what about Optimus Tactical High Yield? Is it built to weather the storm of rising rates better than a simple buy-and-hold of high yield bonds?
 
The proof is in the pudding

Earlier, we looked at a comparison of Government bonds vs. high yield bonds. Now, let's look at how Optimus Tactical High Yield performed during some of the same long-term rising rate environments.

This next chart takes the last 20-years of live and hypothetical performance data of Optimus Tactical High Yield and compares it against those same > -7.5% drops in Government bonds. Along with providing positive returns during those time periods, the hypothetical and live results for the most recent spike in long-term rates (December 2013) were impressive. While Government bonds fell -12.78% during that time, Tactical High Yield showed a net result of +6.89%!

(Source: Morningstar & Optimus Advisory Group)
 
Bottom Line:  We continue to believe that Tactical High Yield can play a significant role in helping you provide financial peace to your clients - strong performance results coupled with minimal drawdowns and volatility. 

 
 
Please call us directly:
(877) 885-7468
 
 
 Follow us on TwitterView our profile on LinkedIn
Optimus Advisory Group's Mission
Optimus Advisory Group manages liquid tactical and alternative investment strategies that meet the needs of our clients.  We use a disciplined, quantitative methodology to build and manage our portfolios.  Over a full market cycle, these strategies are designed to provide superior risk-adjusted returns while maintaining a low-correlation to traditional market indices. 

SMA / UMA / TAMP

Our strategies are available on the following platforms:

  • New!  Schwab Managed Accounts Marketplace
  • Adhesion
  • Foliofn
  • TD Ameritrade
  • FTJ FundChoice
  • Sawtooth
  • Security Benefit Variable Annuity
  • New!  Jefferson National Variable Annuity
 
For more information about any of our programs, please contact us.  You may also download the fact sheets for any of our investment strategies on our website.  Each fact sheet contains strategy descriptions, performance results, backtesting research, disclaimers and disclosures for each model.

  

Thank you for your interest in our investment strategies.  We'll continue to keep you informed.

  

Sincerely,

  


Steve Rumsey

Chief Investment Officer
Optimus Advisory Group
6 Venture, Suite 200

Irvine, CA  92618 

(949) 727-4734

 

Advisory services offered through Optimus Advisory Group,
a registered investment advisor.
Disclosures

The performance results shown include the reinvestment of dividends and other earnings. Comparison of the Optimus Advisory Group Programs to any other indices is for illustrative purposes only and the volatility of the indices used for comparison may be materially different from the volatility of the Optimus Advisory Group Programs due to varying degrees of diversification and/or other factors. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable. Optimus Advisory Group does not make any representation that the Optimus Advisory Group Programs will or are likely to achieve returns similar to those shown in the performance results in this presentation. Optimus Advisory Group reserves the right to trade different funds within their models.   

 

The historical S&P performance results (and those of all other indices and index funds used as proxies for indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual client or prospective client in determining whether the performance of the Optimus' portfolio meets, or continues to meet, his/her investment objective(s). It should not be assumed that any Optimus portfolio holdings will correspond directly to any such comparative index.    

 

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investment strategies devised or undertaken by Optimus Advisory Group) will be profitable for a client's or prospective client's portfolio. All performance results have been compiled solely by Optimus Advisory Group and have not been independently verified.   

 

The Optimus performance results do not reflect the impact of taxes.