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High-yield corporate debt may offer better downside protection than stocks

OAs equity markets continue to be volatile and analysts fear a recession is looming, high-yield corporate bonds are offering higher yields than they have in recent years. years could offer investors better downside protection than stocks, according to Nuveen. According to a report by MarketWatchafter performing a stress test based on a hypothetical 20% drop in stocks and current bond and stock dividend yields, Nuveen found that if stock prices could fall by 19.5%, bonds at high yield would only lose 4.5%.

Yields on so-called junk bonds have also soared. The return of the ICE BofA US High Yield Index, which tracks companies with credit ratings below investment grade, has more than doubled to around 8.4% since a record low of less than 4% about a year ago, even though “credit fundamentals look strong,” Saira Malik, Nuveen’s chief investment officer, wrote in a note to clients on Monday.

Malik argued that the record issuance of low-yielding pandemic debt has been a tailwind for companies with weaker credit profiles, considering that “the debt burden is not excessive and that low rates funding have been blocked”. Nuveen estimated that 75% of high-yield corporate debt outstanding would mature after 2025, giving companies issuing that debt some breathing room if the U.S. economy slips into recession.

In May, BondBloxx Investment Management launched three high-yield corporate bond ETFs which track the ICE BofA US Cash Pay High Yield Constrained Index’s rating-specific sub-indices: BondBloxx BB Rated USD High Yield Corporate Bond ETF (NYSE Arca: XBB), which seeks to invest in bonds rated BB1 to BB3; the BondBloxx B Rated USD High Yield Corporate Bond ETF (NYSE Arca: XB), which seeks to invest in bonds rated B1 to B3; and the BondBloxx CCC Rated USD High Yield Corporate Bond ETF (NYSE Arca: XCCC)which seeks to invest in bonds rated CCC1 to CCC3.

Launched in October 2021 to provide precision ETF exposures to bond investors, BondBloxx was co-founded by ETF industry leaders Leland Clemons, Joanna Gallegos, Tony Kelly, Mark Miller, Brian O’Donnell and Elya Schwartzman. The team has collectively built and launched over 350 ETFs in companies including BlackRock, JPMorgan, State Street, Northern Trust and HSBC.

“Our conversations with investors reinforced what we already knew – there is significant demand for more targeted fixed income products,” Kelly said. “Our initial product suites aim to create a comprehensive toolkit for high-yield investors looking to implement their specific market insights, and we plan to extend this approach to other asset classes. fixed income assets.”

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