Morningstar details the risks facing fixed income investors seeking higher yields:
The ability for even very low-rated, highly leveraged companies to get financing has helped many firms stay afloat when they would otherwise have defaulted in a normal year. The high demand for these speculative issues has caused some investors to discard fundamentals in favor of searching for the highest yield without regard for quality. This strategy has worked so far, but at some point demand will soften, poor business fundamentals will catch up with firms, or the Fed will change its policy.
The article also included this chart showing historical drawdowns in high yield bonds:
This is a pretty good argument for being tactical with your fixed income exposure.
To learn about our approach to tactically managing a broad universe of fixed income, including Treasurys, Corporates, High Yield, International, Convertible, and TIPs, click the image below to watch a short video presentation on our Tactical Fixed Income portfolio (financial professionals only).
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