New high yield funds are hitting the market as Fed prepares to cut interest rates

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New high yield funds are hitting the market as Fed prepares to cut interest rates

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that pop up when focusing on high yield bonds. Because long duration investments have a lot of their value based on far away cash flows, a weakening economy that leads to fears of widespread defaults could cause the spreads to widen, meaning that the quoted yields on the bonds stay the same or even move higher as the Fed cuts rates. This characteristic suggests that a high yield fund could underperform other types of bond funds during a rate cutting cycle, especially on a price basis. Kris Keller, one of the managers for the short-duration focused HYSD, said the short-term high yield market can perform better than the group as a whole during economic drawdowns for this reason, but it doesn’t take away the risk of a default. “Avoiding credit losses is even more paramount, because there’s less of an opportunity to offset those or mitigate those with price appreciation within other investments. And that’s why we take an entirely active approach within the short-duration that’s backed by our rigorous bottom-up credit research approach,” Keller said. Columbia Threadneedle is not the only fund to launch high yield funds this year. Some other recent examples include the BlackRock High Yield ETF (BRHY) and the AB Short Duration High Yield ETF (SYFI) .

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