DoubleLine CEO Jeffrey Gundlach said this week, “The high yield market is tight on the spread, and the economy is weakening, but the quality of the double-B high yield market is pretty good relative to historical standards, can be found in a low-risk manner.” Jeffrey has recently suggested that the Federal Reserve might cut interest rates for the first time in over four years this fall, depending on upcoming inflation data. For the past year, the Fed’s target interest rate has been between 5.25% and 5.5%, benefiting investors in money market funds, CDs, and Treasury bills with high yields. Gundlach predicts the Fed might lower rates by up to 1.50 percentage points in the next year, possibly bringing the rate down to between 3.75% and 4.00%. This potential rate cut could lead to lower yields for cash and short-term investments.
Given this possible change, Gundlach suggests that investors consider moving from floating-rate assets—currently attractive in a high-rate environment—to fixed-rate securities. He recommends BB-rated fixed-rate high-yield bonds as a good option. Although these bonds are not investment-grade and come with risks, such as a higher chance of default and closer ties to equities rather than Treasurys, they offer attractive yields. Gundlach notes that, despite a tight high-yield market and signs of economic slowdown, double-B high-yield bonds have relatively strong quality by historical standards, with yields around 8% providing good income opportunities.
Investors interested in this area might look at exchange-traded funds (ETFs) focused on high-yield bonds, like the iShares BB Rated Corporate Bond ETF (HYBB) and the SPDR Portfolio High Yield Bond ETF (SPHY), which yield 6.22% and 7.68%, respectively. Gundlach stresses the importance of carefully evaluating the risks, quality, and fees of these ETFs. Higher fees can affect long-term returns, so investors should review the ETFs’ holdings and management strategies to ensure they fit their risk tolerance and income goals.
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