Three Reasons to Consider High-Yield Bonds Now
With rate cuts possibly on the horizon, now is the time to take advantage of high-yield bonds to get returns similar to the S&P 500's long-term average.


Fixed income is in fashion — for good reason. Current bond yields are historically high, and rate cuts are on the horizon, so locking in yields before they fall is a potentially attractive proposition.
True to their name, high-yield bonds offer an average yield of about 7.7% as of June 30, 2024. This alone is higher than the 7.4% annual long-term return on the S&P 500 since 2000 (based on Bloomberg data to the end of May 2024). So, a high-yield investment could mean locking in “equity-like” returns from the income alone.
But with credit spreads at about 3.1%, should investors wait for them to widen closer to their 5.2% average since 2000?

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
We think that might not work out — for three reasons:
1. 'Time in the market' might beat 'timing the market.'
Most investors try to “buy low and sell high.”
But, believe it or not, that might not be the best way to play high-yield bonds.
Why? Because income has been a larger driver of high-yield returns than price moves over the years. Since 2000, high-yield bonds earned +7.7% annually from income and -1.3% annually from price moves (according to ICE at the end of May 2024).
To earn income, you need to be invested.
We back-tested several hypothetical automated trading strategies. Each hypothetically traded between high-yield bonds and cash at certain credit spread triggers. To our surprise, almost all trading strategies underperformed a simple strategy of just holding the Bloomberg US Corporate High Yield Index, and none consistently outperformed it, even ignoring transaction costs.* Hypothetical results have inherent limitations and are overly simplistic, but it is an interesting exercise that you can try.
2. Lower credit spreads may be justified.
We think the high-yield market is less risky than it used to be.
Historically (alongside the loan market), high-yield was the primary venue for private equity firms to finance leveraged buyouts (LBOs). This meant a sizable proportion of highly leveraged issuers.
But private equity firms have increasingly turned to the private credit market instead. The private credit market’s share of LBO issuance (by number of deals) has soared from 60% in 2019 to 86% in 2023, according to Barclays Research. We believe this may help lead to structurally lower default rates in high-yield bonds.
Average credit quality in the high-yield market has also improved: About 46% of the Bloomberg US Corporate High Yield Index is BB-rated (the highest high-yield rating) today vs about 34% in 2000, according to Bloomberg at the end of May 2024.
Smaller issuers with less frequently traded bonds command an “illiquidity premium,” which is reflected in higher credit spreads. But managers with access to technologies such as credit portfolio trading can trade these issuers as easily as the big names, so they have less need to demand an additional premium.
3. Credit spreads may offer more than adequate compensation for default risk.
We often take polls of investors, asking what they think average high-yield default rates are. Usually, they respond with something between 3% and 5% per year.
It may surprise you that, by our calculations, the average annual default rate on the Bloomberg US Corporate High Yield Index (including distressed exchanges) has been 2.5% since 2005, and the average loss from default has been 1.4%.
As such, we think credit spreads of about 3% offer ample compensation for default risks. One caveat, though: Many high-yield strategies hold only 10% to 30% of the 2,000 U.S. high-yield bonds available, and concentrations like this may amplify the risk of default. For those considering a high-yield vehicle, check how many bonds they hold. Investors may need to turn to a systematic approach to access a fully diversified high-yield strategy.
Waiting might be the wrong call
All-in bond yields are made up of two components: government bond yields and credit spreads. Both have tended to move counter to each other, providing a mutual stability buffer.
When credit spreads widen (usually a result of economic concerns), government bond yields tend to fall, due to a “flight to quality” or market expectations that the central bank will need to cut rates to stabilize the economy. When credit spreads tighten, government bond yields sometimes rise, due to lower demand for low-risk havens.
As such, waiting for credit spreads to widen might not mean investing at significantly higher all-in yields. If you consider all-in yields attractive, now might be a good time to consider an allocation. We believe now is the time to consider locking in high-yield bond yields before rate cuts take effect.
* Where model or simulated results are presented, they have many inherent limitations. Model information does not represent actual trading and may not reflect the impact that material economic and market factors might have had on insight’s decision-making.
Related Content
- Types of Bond Fund Yields and What They Mean
- What's the Difference Between a Bond's Price and Value?
- Are Bonds Back? A Fresh Look at Fixed Income in 2024
- Should You Still Have Bonds in Your Portfolio?
- Best Bond Funds to Buy
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Paul has 30 years of experience in the investment industry. He joined BNY Investments affiliate Mellon Investments in 2005 and has been Head of the Systematic Fixed Income Team since 2015. In September 2021, Mellon Investments’ fixed income strategies, including the Systematic Fixed Income Team, formally joined Insight. Based in San Francisco, Paul and his team of portfolio managers, researchers and traders pioneered the development of highly implementable systematic fixed income strategies by combining innovative model-driven alpha research with cutting-edge trading technology.
-
Retirement Reimagined: Finding Your Tribe in LGBTQ-Focused Communities
Demand for LGBTQ retirement communities in the U.S. is high, but inventory is not easy to find. Here are some safe havens to explore.
-
Ask the Editor, June 20: Questions on Tax Deductions and IRAs
Ask the Editor In our latest Ask the Editor round-up, Joy Taylor, The Kiplinger Tax Letter Editor, answers four questions on deductions, tax proposals and IRAs.
-
The $1 Million Retirement Question: Are You Being Tax-Smart About Your Pension?
A financial planner raises some key considerations for navigating retirement with a pension and recommends four strategies.
-
The Costly Mistake You Might Be Making With Your First 401(k)
Most people start contributing to their retirement savings later in life. That could be a big-time mistake, literally costing you thousands of dollars.
-
An Estate Planning Attorney's Guide to the Importance of POAs
Regularly updating your financial and health care power of attorney documents ensures they reflect your current intentions and circumstances. It's also important to clearly communicate your wishes to your chosen agents.
-
Divorce and Your Home: An Expert's Guide to Avoiding a Tax Bomb
Your home is probably your biggest asset, so if you're getting a divorce, the stakes are high. Keep it? Sell it? You need to have a good plan in place for how to handle it.
-
Fewer Agents, Fewer Audits: How IRS Staff Cuts Are Changing Enforcement
Significant reductions in the IRS workforce appear to be increasing the number of 'no change' audit closures. The shift could potentially increase the overall tax gap — the difference between taxes that should have been paid and those that were.
-
What if You Could Increase Your Retirement Income by 50% to 75%? Here's How
Combining IRA investments, lifetime income annuities and a HECM into one plan could significantly increase your retirement income and liquid savings compared to traditional planning.
-
Here's Why You Shouldn't Do an Estate Plan Without a Financial Planner
Estate planning isn't just about distributing assets. Working with a financial adviser can ensure you've considered the big picture — and the finer details.
-
Trump Tariffs and Taxes: Waiting to See What Happens Is Not a Strategy
Like presidents, tariffs come and go. Policy changes also shift about every two years with the election cycle. If you're paralyzed by uncertainty, you could be missing opportunities to benefit your financial future.