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Forecasting U.S. High-Yield Bond Returns

Oct. 10, 2018 10:13 AM ETFLOT, HYG1 Comment
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Data Focus


  • The U.S. high-yield bond index is up 1.8% year to date.
  • High-yield bonds are still expensive.
  • The base case of the high-yield bond total return is 0.9% for the rest of 2018.

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The U.S. high-yield bond index is up 1.8% year to date as of Oct. 9. In this article, we will forecast its potential return for the rest of 2018.


The U.S. high-yield bond market was developed in the 1970s. The best time to invest in high-yield bonds is during the expansion stage of a business cycle, such as the one in 2009 (up 57.5%). The worst time to invest is at the beginning of a recession, such as the one in 2008 (down 26.4%).

Figure 1

Table 1


High-Yield Bond Index Total Return





















Source: FRED - BofA Merrill Lynch U.S. High-Yield Master II Total Return Index Return

During the current expansion stage since June 2009, there were periods when high-yield bonds experienced a decline. One example is when commodity prices - especially crude oil prices - collapsed in 2015.

High-yield bonds are still expensive, even though the index price is down 0.73% month to date due to the bond market sell-off. The option-adjusted spread (OAS) above the treasury curve reflects the risk level of high-yield bonds. On Oct. 3, when the bond market sell-off had just began, it decreased to 3.16% - the lowest level since 2008 (see Figure 2). The OAS has been widening since then, and reached 3.41% on Oct. 9 - still at a historical low since 2008.

Figure 2

For high-yield bond

This article was written by

Data Focus profile picture
Ten-plus years of experience in finance focusing on bonds, equity and investment strategies with a quantitative approach.

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