What are High Yield Bonds?
High yield bonds are corporate securities with credit ratings below investment grade. Since non-investment-grade companies usually pay higher interest rates than more creditworthy borrowers, their bonds are called “high yield.” High yield bonds can be used to diversify an investment portfolio because their performance has a low correlation with investment-grade bonds such as Treasuries. Like stocks, high yield bond prices are more sensitive to the economic outlook and corporate earnings than to day-to-day interest rate fluctuations. While high yield bonds share some behavioral characteristics with stocks, their overall returns should be less volatile because their income is normally much higher.
Credit analysis is central to high yield bond investing. It focuses on individual characteristics and fundamentals of issuers as well as the downside risk of default. Portfolios of high yield bonds are diversified by industry group and issue type. Today’s vast high yield market enables portfolio managers to achieve extensive diversification by industry, issuer, as well as by the individual issue within a credit’s capital structure. By actively managing portfolios, PIMCO seeks to lower portfolio volatility while enhancing returns.
