Fixed income

Why high-yield bonds are an alternative to equity investments

As investors, we are often liable for thinking in specific asset class buckets rather than taking a broader view of the investment universe. Yet, taking that cross-asset class view can allow for some smarter investment choices and allocations.

Let’s take high-yield bonds and US equities for example: While there are many similarities in their characteristics, there are clearly differences, too – the main one being the asset class distinction. And within the investment world, asset class buckets tend to be inflexible.

But when looking at risk-return characteristics, high-yield bonds and equities are more similar than most imagine and could be viewed as competing asset classes. So much so, that we would argue that high-yield bonds should be considered as an alternative to equities, but with lower volatility.

US high yield versus US equities: Volatility is the differentiator

In 2019 US high yield returned 14.41%.[1] In comparison, the S&P 500 returned 31.48% over the same period.[2] However, if you look at a longer time horizon, US high-yield bonds have largely kept pace with equities while having lower drawdowns during periods of volatility. For instance, during the financial crisis of 2007/8, the maximum drawdown of the US high-yield index ICE BofA ML High Yield Index was -33.23% compared to -50.95% for the S&P 500.[3]

Although US equities outperformed the high-yield market in 2019, over the past 20 years US high yield outperformed the S&P 500 (7.01% vs 6.33% annualised). And while the correlation between high yield and equities is historically high (0.65 over the last 20 years), there are significant differences in the underlying volatility of the two – making US high yield markedly less volatile at 8.96 compared to equities at 14.53.[4]



In order to generate returns on equities, you need earnings growth or multiple expansion. However, as an investor in high yield, your return is more reliable as it comes from your coupon payment. And default rates are nowhere near their 2009 peak of 12.1% or their 2016 high of 4.3%.[5] Estimates for 2019 are at 2.9%, with an increase to 3.0% in 2020 (as Graph 2 shows) – both of which remain below the long-term average of 3.4%.



US election, Brexit and economic uncertainty

Looking into 2020, there are plenty of reasons to expect further uncertainty. For one, the 2020 US presidential election is likely going to create some waves throughout the year, which could have a negative impact on the already tense trading relationship between the US and China. Also, Brexit is not yet resolved, and according to our Global Economic Outlook 2020, across most of the developed economies and Asia, gross-domestic product is expected to grow less in 2020 than in 2019.[6]

Bearing this in mind, generating equity returns from multiple expansion and earnings growth looks to be more difficult to achieve than collecting high-yield coupon payments. So, consider high-yield bonds as an alternative to equities for your portfolio in 2020, for equity-like returns with significantly lower volatility.

[1] Source: ICE BofA ML US High Yield index.


[3] Source: Morningstar.

[4] Source: eVestment Analytics, ICE BofA US High Yield index and S&P 500. Data for the last 20 years as of 31 December 2019.

[5] Source: J.P. Morgan, Default Monitor, 2 January 2019. High-yield bonds long-term default rate since 1997, leveraged loans long-term default rate since 1998.



This communication is intended for professional adviser use only and should not be relied upon by retail clients. Circulation must be restricted accordingly.

Issued by AXA Investment Managers UK Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No: 01431068 Registered Office is 7 Newgate Street, London, EC1A 7NX. A member of the Investment Management Association. Telephone calls may be recorded or monitored for quality.

Information relating to investments may have been based on research and analysis undertaken or procured by AXA Investment Managers UK Limited for its own purposes and may have been made available to other members of the AXA Investment Managers Group who in turn may have acted upon it. This material should not be regarded as an offer, solicitation, invitation or recommendation to subscribe for any AXA investment service or product and is provided to you for information purposes only. The views expressed do not constitute investment advice and do not necessarily represent the views of any company within the AXA Investment Managers Group and may be subject to change without notice. No representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.

Past performance is not a guide to future performance. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Changes in exchange rates will affect the value of investments made overseas. Investments in newer markets and smaller companies offer the possibility of higher returns but may also involve a higher degree of risk. Ref-15274