Last year was unique – with both bonds and stocks down, there weren’t many places to find reprieve from widespread market volatility. As a result, bonds prices fell below par. For short duration high yield, this has only happened approximately 25% of the time in the last 20 years. This creates total return potential beyond just income. In a yield environment where short term Treasuries are yielding over 5%, it is important for investors to consider total return when deciding on a fixed income allocation.

Short duration high yield, as represented by ICE BofA Cash Pay High Yield (1-5Y)(BB-B) Index, consists of relatively higher quality, seasoned bonds, or bonds that were issued at least a few years ago. Typically bonds with longer maturities have higher coupons than similar credits with shorter maturities. So as time passes and high yield bonds move their way into the shorter duration part of the market, their coupons will be high relative to their yield which results in a premium, or bonds trading above par. This is why the median short duration high yield price is 102.1. The current price is 93.2, right around the 10th percentile and almost 9 points below the median.


Figure 1: Current price opportunity: Price in 10th percentile 

Source: FactSet, for the period 5/16/2003 – 5/16/2023. Short duration high yield represented by ICE BofA Cash Pay High Yield (1-5Y)(BB-B) Index. It is not possible to invest directly in an index. Past performance does not guarantee future results.


One of the ways bonds differ from stocks is that bonds have math on their side, due to coupons and maturities. As time passes a bond becomes closer and closer to its maturity. In simple terms, a bond will either mature, or it will default, and if default seems unlikely, it will be “pulled to par” meaning its price will appreciate towards par as it nears maturity. Since most bonds have not historically defaulted, investing when prices have been below par has led to attractive returns. With respect to short duration high yield, looking back 20 years, the median 1-year return from any price below par has been 12.0%. The median 2-year cumulative return is 18.4%. These results can be largely attributed to a strong pull to par effect because of short maturities, relatively high coupons, and the avoidance of the riskiest part of the market, CCC-rated bonds.


Figure 2: Higher median returns when prices are below par

Source: FactSet 3/31/03 - 3/31/23. Short Duration High Yield represented by ICE BofA High Yield 1-5 BB-B Index. It is not possible to invest directly in an index. Past performance does not guarantee future results.


When talking about high yield valuations and return potential, it is important to also discuss fundamentals. The 12-month default rate as per JP Morgan is 1.4% and expected to increase to around its long-term average. One reason we don’t expect abnormally high default rates is that there was a large amount of refinancing activity during 2020 and 2021 – issuers were able to lock in low interest costs which in turn led to record interest coverage ratios. Although the economy is certainly slowing down, high yield issuers are coming into this downturn from a position of strength.

During the pandemic, there was a massive wave of downgrades from investment grade into high yield, including three of the largest on record – Kraft Heinz, Ford, and Occidental Petroleum. Kraft Heinz has already become a “rising star”, getting upgraded back to investment grade and according to LCD News, Occidental Petroleum will likely become a “rising star” soon as Fitch just upgraded their rating of the issuer. So, companies are still able to improve their balance sheets and strengthen their financial position.

That said, many investors are looking for ways to increase the quality of their portfolios and we believe short duration high yield can accomplish that goal. For starters, last year the broad high yield market was down 11.2%, however short duration high yield was only down 5.5%.

Additionally, high yield bonds that are closer to maturity are less sensitive to rate moves. Similarly, spread widening and tightening impacts prices of shorter duration bonds less than longer duration ones. For this reason, and the fact that the index excludes bonds with the most credit risk, CCCs, is why the asset class can be characterized as a lower volatility segment of high yield.  Not only does it have less volatility than the broad high yield market, but it also has less volatility than investment grade corporate bonds.


Figure 3: Short duration high yield has had less volatility than investment grade corporates

Source: FactSet, as of 4/30/2023. Short duration high yield represented by ICE BofA Cash Pay High Yield (1-5Y)(BB-B) Index; US Corps IG represented by ICE BofA US Corporate Index; High yield represented by ICE BofA US High Yield Index. It is not possible to invest directly in an index. Past performance does not guarantee future results.


Short duration high yield can be considered an “all-weather approach” to high yield investing because of its lower volatility profile and higher quality bias – it has tended to be more resilient than the broad market. Historically, it has generated a particularly high yield given its shorter maturity profile and has had a greater yield per unit of duration than most other areas of fixed income, including short duration investment grade corporates, emerging market debt, and core bonds. Therefore, historically this asset class has been used through the cycle holding to generate income and provide diversification.


Figure 4: Competitive yield per unit of duration compared with other areas of fixed income

Source: FactSet as of 4/30/23. Short Duration High Yield represented by ICE BofA High Yield 1-5 BB-B Index. High Yield represented by ICE BofA U.S. High Yield. Short Duration Investment Grade represented by ICE BofA U.S. Corporate (1-5 Y). EM Debt represented by JP Morgan EMBI Global Diversified. U.S. Corporates represented by ICE BofA U.S. Corporate. Core bonds represented by Bloomberg U.S. Aggregate. Treasury represented by ICE BofA U.S. Treasury. It is not possible to invest directly in an index. Past performance does not guarantee future results.


Finding income was a challenge for much of the recent past. We now find ourselves in a place where income is available – as of 5/23/23, T-bills are yielding over 5%! With investors looking to step out of cash while keeping a watchful eye on risk, it is time to look at fixed income through a total return lens. With deep discounts, favorable fundamentals and short maturities, high yield may present an attractive risk-adjusted return opportunity. In particular, given its rare discount, short duration high yield may be the right mix of quality and return potential that advisors are looking for in order to start shifting away from cash.


About Risk

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. These risks may be greater for emerging markets. High yield securities (junk bonds) have speculative characteristics and present a greater risk of loss than higher quality debt securities.  These securities can also be subject to greater price volatility. 

Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner.

Opinions expressed herein are current opinions as of the date appearing in this material only. Investing involves risk, including possible loss of principal. Asset allocation and diversification may not protect against market risk, loss of principal, or volatility of returns. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. No representation is being made that any account, product, or strategy will or is likely to achieve profits.

This material represents an assessment of the market environment as of a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision. The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.


ICE BofA U.S. High Yield Index tracks the performance of U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market.

The ICE BofA 1-5 Y BB-B Cash Pay HY Index tracks the performance of BB-B rated U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market with maturities of 1 to 5 years.

The ICE BofA U.S. Corporate 1-5 Year U.S. Corporate Index is a subset of ICE BofA U.S. Corporate Index including all securities with a remaining term to final maturity less than 5 years.

JP Morgan EMBI Global Diversified Index tracks the traded market for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.

The ICE BofA U.S. Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market.

The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the Investment Grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities, and commercial mortgage-backed securities.

ICE BofA U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government in its domestic market. Qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $1 billion. Qualifying securities must have at least 18 months to final maturity at the time of issuance.

Duration measures how long it takes, in years, for an investor to be repaid the bond’s price by the bond’s total cash flows. Duration is a measure of sensitivity of a bond's or fixed income portfolio's price to changes in interest rates.

Standard Deviation measures how widely dispersed a fund’s returns have been over a specified period of time. A high standard deviation indicates that the range is wide, implying greater potential for volatility.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. Securities are distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.