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- Who We Serve
- What We Do
- About Us
- Insights & Research
Why High Yield?
The high yield market has undergone significant changes compared to a decade ago. Higher credit quality and benign default rates, combined with improving corporate fundamentals and strong inflows have peaked investor confidence.
- High Yield Strategy
- Education
Key Points
What it is
We explain what we believe makes high yield bonds a compelling investment now.
Why it matters
High yield bonds have historically delivered equity like returns, without the equity-like volatility, over the full market cycle while also providing diversification benefits as seen in our Why High Yield video below.
Where it's going
Compared to a decade ago, the quality of the high yield market has improved, giving investors compelling opportunities for capital appreciation while seeking to mitigate the risk of losses.
Why High Yield?
High yield bonds are an important and liquid market for companies below investment grade rating to find financing. At Northern Trust, we classify high yield as the least risky risk asset. This is because they historically have delivered equity like returns, without the equity like volatility over the full market cycle, thanks in part to its income component. The asset class also provides important diversification benefits and is often a cushion for investors’ portfolios when the stock market falls.
While economic uncertainty could spark market volatility, we think the high yield market offers a compelling opportunity in the current environment. The high yield market has undergone significant changes. Compared to a decade ago, the quality of the high yield market has improved, with a greater proportion of higher rated issuers and fewer, lower rated issuers. The ability for companies to cover interest with earnings is strong, and debt accumulation by companies is restrained, potentially helping to avoid defaults or mitigate losses if default does occur. The markets are welcoming for issuers looking to term out their debt, and there is little near-term need for refinancing by the more vulnerable issuers.
Income is an important component of high yield returns, and the yield for the high yield market is broadly seven three quarters percent, which historically has been correlated to periods of high distress, but importantly representative of strong prospective total returns.*
*Past performance in not indicative of future results.
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Bond Risk: Bond funds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price, especially for longer-term issues and in environments of rising interest rates.
Credit (Or Default) Risk: The risk that the inability or unwillingness of an issuer or guarantor of a fixed-income security to meet its payment or other financial obligations will adversely affect the value of the Fund’s investments and its returns. Changes in the credit rating of a debt security held by the Fund could have a similar effect.
High-Yield Risk is the risk that the Fund’s below-investment grade fixed-income securities, sometimes known as “junk bonds,” will be subject to greater credit risk, price volatility and risk of loss than investment grade securities, which can adversely impact the Fund’s return and NAV. High yield securities are considered highly speculative and are subject to the increased risk of an issuer’s inability to make principal and interest payments.
Sector Risk is the risk that companies in similar businesses may be similarly affected by particular economic or market events, which may, in certain circumstances, cause the value of securities of all companies in a particular sector of the market to decrease.
Please carefully read the prospectus and summary prospectus and consider the investment objectives, risks, charges and expenses of Northern Funds carefully before investing. Call 800-595-9111 to obtain a prospectus and summary prospectus, which contains this and other information about the funds.
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