Investors often think of high-yield bonds as simply another component within a fixed-income allocation. But while high-yield bonds may look like other bonds, they don’t necessarily act like them. Over the long run, high-yield performance patterns don’t closely track those of other fixed-income investments.
In fact, our research shows that high yield has a lot more in common with stocks—with one important difference: it’s much less volatile. While returns are similar over time, high yield loses less in down markets than equities do—and it recovers those losses more quickly. This built-in downside protection helps lower overall portfolio volatility.
In this paper, we explain how high-yield bonds might fit into a portfolio. Our research suggests that investors who want steady income and strong risk-adjusted return potential might want to consider high-yield bonds as a worthy replacement for part of their equity exposure—or even as a stand-alone allocation distinct from stocks and bonds.