High Yield Happenings: How short-dated high yield can help manage risk

In our previous High Yield Happenings, we looked at two different ways to answer to a question we are often asked by clients: where does short-dated high yield sit in a portfolio context? First, we looked at using it as part of a balanced portfolio of equities and bonds. We then looked at using it to supplement the returns from a strategic allocation to cash. 

For the final instalment, I thought it was worth talking about the role high yield can play in managing risk – how it can allow investors to take some of their chips off the table, while still retaining the potential to generate meaningful returns.

Given the headlines over the first half of this year – the closure of the Strait of Hormuz, geopolitical uncertainty, and signs of renewed inflationary pressures – one could be forgiven for expecting risk markets to have been flat at best. Obviously, this has not been the case. At the halfway point of 2026:

• The S&P 500 was up 12% in sterling terms.
• MSCI Europe was up 10%.
• The Nikkei, meanwhile, was up 37%, despite a jump in yields on Japanese government bonds.¹

Whether you view this as a triumph of the ability of capitalism to react efficiently to changes in the operating environment – or simply as a signal that a huge Ponzi scheme is about to collapse – probably comes down to your views on technological progress and the underlying efficiency of capital markets. 

Given this environment, one could be forgiven for looking at the 3.4% return from US high yield over the year to date and asking why anyone should bother with it. After all, equity markets produce high total returns over the long term and it’s not as though high yield is a 'risk-off' asset. I would respond by pointing to two charts.

Short-dated high yield outperformed equities after the TMT bubble burst (2000-02)

Comparing US-dollar denominated returns from short-dated high yield (the ICE BofA US 1-5yr BB-B index) to global equities (MSCI AC World). Source: Artemis, Lipper, MSCI, ICE BofA Indices from 31 December 1999 to 31 December 2002.

The first shows the performance of short-dated global high-yield bonds relative to equities from the start of the millennium through to the end of 2002. There are a couple of things to highlight here. The first is that returns from high yield clearly show the benefit of having a contractual right to near-term cashflows. The second is that, while equity markets are a great place to be when multiples are expanding and profits are growing (and, indeed, that is what is happening most of the time), things can turn nasty when profits fall and p/e multiples contract. 

It is not that high yield was perfectly set up to perform well in the period after the dotcom bubble. Back in 2000, bonds issued by telecoms, media and technology (TMT) companies accounted for around a third of the market². As a result, the cumulative default rate over this period was the worst in history³ and spreads doubled⁴. Here's the key point, however: the rise in defaults and the dramatic widening in spreads was almost entirely offset by the income that high-yield bonds paid over the period. Over the dark days of 2000-02, short-dated high-yield bonds – a contractual claim on near-term cashflows – produced a 10% return while global equities fell by more than 40%. 

Short-dated high yield can also deliver compelling returns across longer timeframes (2000-06)

Comparing US-dollar denominated returns from short-dated high yield (the ICE BofA US 1-5yr BB-B index) to global equities (MSCI AC World). Source: Artemis, Lipper, MSCI, ICE BofA Indices from 31 December 1999 to 31 December 2006.

The second chart shows that investors have also done pretty well by investing in high yield over longer time periods. While high yield has generally delivered lower levels of return than equities through periods of strong equity-market performance (such as 2003-06), it has seen far lower levels of drawdown in periods of equity market weakness. 

So, through the cycle – and unless you think market cycles have been abolished, this is a relevant observation – high yield can hold its own in terms of both absolute and risk-adjusted returns. Returns from high yield may lag those from equities through the good times – but history suggests they make up for that when times get tough.