High-Yield Bonds
Definition
High yield bonds, also known as junk bonds, are corporate bonds that carry a lower credit rating (typically below BBB- by S&P or Baa3 by Moody's). These bonds offer higher interest payments to compensate investors for taking on greater credit risk.
Issuers are often smaller companies, firms with higher debt loads, or businesses in volatile industries.
Why It Matters to Investors
- Offer higher income potential than investment-grade bonds
- Prone to larger price swings and higher default risk
- Perform well during economic expansions but tend to sell off sharply in downturns
- More correlated with equities than Treasuries
- Sensitive to changes in credit spreads and investor risk appetite
The TiltFolio View
Neither TiltFolio system includes high yield bonds in their asset allocations. While they may enhance income in bull markets, their equity-like volatility and downside risk make them a poor defensive asset in risk-off conditions.
In periods of market stress, high yield bonds often suffer alongside equities due to surging default risk and credit spread widening. TiltFolio Adaptive is designed to rotate into safer asset classes, like Treasuries, or even cash, during these phases, rather than attempting to capture carry from high yield exposure. TiltFolio Balanced maintains exposure only to high-quality government bonds (IEF and TLT) as part of its diversified allocation.
Both systems prioritize capital preservation over yield enhancement, focusing on assets that provide stability during market stress rather than higher income potential.
Real-World Application
• Investors seek higher returns by allocating to ETFs like HYG or JNK
• High yield bonds underperform sharply during recessions or liquidity crises
• Credit spreads widen as market sentiment turns cautious