The current attractive opportunity in high yield fixed income securities
At the time of writing, stock markets are in a correction due to a variety of stresses and fears, such as inflation, rising interest rates and the uncertainties caused by the Russia-Ukraine war. While war is certainly on the minds of investors (we acknowledge the great human tragedy, but will put that aside for this article on investing), inflation and interest rates are more important to markets. The 10-year government bond yield is now at 2.11%, the highest since June 2019, see chart below. Inflation and oil prices have been climbing ever higher and markets are waiting to see if inflation returns to a more manageable number, albeit higher than in the past.
The most noticeable area of correction is in the tech and “fad stock” sectors, where the Nasdaq index is down about 20%, and widespread favorites like Tesla (should any auto company, no matter the size, ever hit $1.3 trillion be worth? ), Facebook and Netflix are down about 35% to 45%. Pandemic favorite Zoom video is down about 50%. Large cap stocks are in correction territory, down about 12%. At the same time, bond indices have fallen, with the high yield bond index down 7-8% (HYG), the investment grade bond index down 9% (LQD) and the preferred stock index down 10-11% (PFF). . Many popular closed-end mutual funds are down even more, like PIMCO’s Dynamic Income Fund (PDI) down 14-15% and the Doubline Opportunistic Credit Fund (DBL) down 10%.
We believe the current market correction has created bargains in high yield fixed income and represents an opportunity to secure a high yield portfolio that is well positioned to weather rising rates that could persist in response to higher inflation. We manage fixed income portfolios to protect against rising interest rates in two ways: (1) investing in short- to medium-term instruments and (2) investing in fixed-income, floating-rate securities. The other important component is selecting issuers with solid credit quality related to high yield investments in fixed income securities. Investment grade fixed income securities always have a higher overall credit quality than high yield fixed income securities, but with due diligence and portfolio diversification, the risk/reward tradeoff in high yield securities is typically more attractive.
When we say high yield fixed income, we mean a broader investment spectrum than just high yield bonds. Here are the key asset classes that make up our high yield income portfolios, which provide the diversity necessary to significantly reduce the risk of a potential poor outcome in a single position:
1) Traditional high yield bonds sold in the bond market
2) Exchange-traded bonds, which are usually sold on the stock exchange in $25 increments and are often issued by smaller companies
3) Preferred stocks, which often have a variable rate or a fixed rate that offers good protection against rising interest rates
4) closed-end funds, which are a broad fund universe that gives investors access to fixed income segments only available to institutional investors, such as bank loan funds and mortgage-related assets; These funds are often attractive because they are trading at a discount
Portfolios can be constructed with a target return in mind, depending on the return objectives or income needs of the portfolio. Here are some of the opportunities we are now investing for clients. (Please note that these are for discussion purposes only and should not be taken as recommendations as every investor’s needs will be different based on a variety of factors. High yield fixed income securities are not suitable for all investors. The information below is simply a broad summary of the investments and there are many more details that would need to be considered to fully understand and consider the investment):
High Yield Bonds: Delek Logistics Partners 6.75% as of May 15, 2025, trades at face value to yield 6.75%. Delek (DKL) owns and operates crude oil, intermediate and refined product logistics and marketing facilities in the United States. Performance has been strong with 9% EBITDA growth in 2021 and modest leverage in the low 3x range. The three-year term is attractive.
Exchange Traded Notes: Notes issued by Eagle Point Income Company, 5.00%, as of 31 October 2026, trading under the ticker symbol EICA. The issue trades at around $23.46, a discount of 6% to par ($25), hence the yield to maturity is 6.6% (The bonds are technically classified as maturity preferred stocks, but are very behaving similar to a bond with a maturity date of 2026). The issuing company is a closed-end fund that invests in CLOs’ debt tranches. The regulation requires asset coverage to be maintained at a minimum of 200% to provide investors with excellent protection. Current assets are covered by 300%.
Preferred Stock: Dynex Capital, 6.9% Fixed Rate Cumulative Preferred Stock segiant C (DX.PC). TThe issue is fixed at 6.9% until 04/15/2025, when it will be converted into a floating rate issue with LIBOR +5.45%. The issue is currently trading at $24.50, a 2% discount to face value ($25). The current yield is 7.00% and if the issue is called in April 2025 this would result in a yield of 8.15% (whether this will be called is unknown). When not invoked, investors enjoy a variable interest rate that protects against rising interest rates. Dynex (DX) is a mortgage REIT with a 98% portfolio of agency securities, which are virtually government-backed and therefore considered near risk-free. While the stock price can fluctuate based on a variety of factors, preferred stock enjoys a preference for its fixed dividend, so stock price doesn’t matter much to preferred stock investors. DX weathered the pandemic well and its share price is now higher than before the pandemic.
Closed Funds: BNY Mellon Alcentra Global Credit Income 2024 Target Term Fund (DCF). This closed-end fund is in a unique fund category as it has a mandatory liquidation date of December 1, 2024. The fund invests in a variety of income-oriented asset classes, with bank loans accounting for 40%, and the remainder structured credit and high yield bonds. The fund trades at $8.26/unit, a 5% discount to NAV; For most of 2021, the fund traded at a premium but fell during this correction. In addition to its 7.3% yield (which is 100% backed by net investments according to its most recent financial statements), investors will recover any discount to NAV when the fund is liquidated in December 2024, further enhancing returns.
In our experience, these “windows of opportunity” to achieve higher returns are limited to a few months, occurring every few years, sometimes less frequently. While we cannot predict the future course of the markets, we expect many of these fixed income issues to trade back to their 2021 levels or even higher once the Fed takes some steps and the situation in Russia/Ukraine moves towards some sort of resolution developed – – especially those with maturities of less than five years or other features that protect against rising interest rates.
Please note that the author holds the highlighted investments in personal and client accounts and may have added or will add positions at any time before or after the publication of this article.
It is important to note that high yield fixed income investments such as those highlighted in this article are not, by definition, “investment grade” and are therefore only suitable for investors who are willing to accept a higher fixed income risk profile. Consider high yield bonds and similar investments only as part of a broader investment portfolio allocation to diverse assets of all risk profiles.
Please see the Downtown Investment Advisory profile page for the important wording of the disclaimer which is an integral part of this article.