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Friday, May 31, 2013

Short Term High Yield Instead of Intermediate or Long Term Bonds: The Strategy Holds Up During the Bond Selloff

I have written several times about avoiding intermediate and long term bonds in portfolios and concentrating on short term high yield etfs (SJNK yielding 4% and Hyld yielding 8%) as a major part of bond portfolios and as a place to park cash along with lower risk GNMA and Short term investment grade bond funds and etfs.

While many non market watchers may not have been looking, May saw a major increase in medium and long term interest rates. The ten year treasury yield went from 1.6% to over 2.1% a one year high (in conjunction with the move of 30 year mortgages to a high of 4%). As bond yields move up bond prices for longer term bonds move down. Below are charts of the intermediate and long term treasury bond ETFs compared to the short term high yield bond ETF (sjnk) as you can see the fund has remained steady meaning the investor picks up the yield while the investors in longer term and intermediate term bonds suffered price losses that well exceeded the yield making the total return negative.

While I cant predict the future of interest rates, this does show the advantage of the strategy of moving from intermediate and longer term bonds to short term high yield.. When rates move up longer and intermediate term bonds will show a loss while short term high yield ihas been shown in this case to hold its value.

1. Intermediate term treasury bond ETF (IEF dark line) vs  SJNK short term high yield bond price chart.

2. Long term Treasury Bond ETF TLT  vs SJNK Term High Yield Bond (brown)

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