How have high-yield bonds historically performed at the start of an interest rate cut cycle? We’ve taken a closer look and will explain how the markets have historically performed during such phases.
The cycle of interest rate cuts has begun:
In June, the ECB cut its key interest rate for the first time since 2016.
The capital markets had been hoping for this for some time and are already pricing in further moves in the coming months.
But are interest rate cuts really a cause for celebration for investors in high-yield bonds?
In theory:
In practice:
In particular, interest rate cuts in response to an acute crisis or recession often come too late, and their economic impact is too delayed to halt a further decline in corporate bond prices.
For example, in 2001–02, the market fell another -30% after the first rate cut and did not bottom out until after three additional rate cuts totaling -125 bps. In 2008, too, two further
rate cuts totaling -125 bps were necessary before the market bottomed out at -19% lower. The situation in 2011, however, was different. Although the market had already fallen by -14% in the wake of the euro crisis, it had already stabilized by the time of the first rate cut in November 2011 due to the ECB’s bond-purchase program. Furthermore, the rate cut was merely a response to slowing economic growth, not an acute recession. Thus, the timing of the first rate cut would have been a fairly good entry point (the market fell by 4% over the next two weeks and then moved in only one direction…).
Source: Bloomberg, ICE BofA Euro High Yield Index (HE00), “rate cut cycle” (narrow definition) = first through last rate cut
2024?
Source: Bloomberg, Bloomberg Euro High Yield ex Financials BB-B 3% Capped Total Return Index (H23969EU Index)
Conclusion:
The current cycle of interest rate cuts cannot be compared to any of the previous cycles—we are neither in the midst of an acute crisis nor do we need to fear significant price declines, nor are we currently seeing elevated risk premiums that would lead us to expect a significant tightening and the resulting sharp price movements.
Instead, investors should expect a rather unspectacular high-yield performance this time around—namely, roughly in line with the current yield of 5–6%. While interest rate cuts do stabilize economic growth and can prevent risk premiums from widening, there isn’t much room left for further tightening at current levels.
In an environment where central banks explicitly base their decisions on data (“data-dependent”), periods of conflicting or even disappointing economic data can lead to temporary increases in volatility. Active investors focused on fundamental analysis can capitalize on this through skillful stock selection.
For this reason, it is advisable to entrust investments in corporate bonds in general—and high-yield bonds in particular—to a proven fixed-income credit specialist. At HAGIM, we believe our investment philosophy—based on in-depth fundamental credit analysis—equips us to handle such challenges exceptionally well.
Risks
Price losses due to increases in yields and/or higher risk premiums are possible. A total loss cannot be ruled out either. Past performance is not indicative of future results, nor can future performance be guaranteed.
Disclaimer
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