Yieldstream Blog

Trend-following on High Yield bonds in a rising interest rate environment

In this post, we’ll take a look at the performance of our tactical High Yield bond strategy during periods of rising interest rates. First, a brief overview. Below is a chart that shows the interest rate of 3-month Treasury Bills since 1954: Short-term interest rates (as represented by 3-month T-Bills) have fluctuated in a wide range. After World War II, rates were very low (less than one percent)...

Improving the real return of the Yieldstream high yield bond investment strategy

Readers often ask whether our Yieldstream strategy works in smaller investment accounts. They inquire about the performance impact of holding just one fund at a time (instead of all 3 in our model portfolio), and wonder whether there’s any way to reduce trading expenses (brokerage fund commissions). In this post, we take a closer look at several variations on the Yieldstream strategy which address these ...

Bond portfolio management strategies

There’s no single best answer to how to construct and manage a bond portfolio. There are several options that will appeal to different types of investors. The simplest possible way to invest in bonds is to buy a diversified bond fund. For example, you can buy the Vanguard Total Bond Market Index Fund (VBMFX). This mutual fund replicates the investment performance of the Barclays Capital U.S. Aggregate Bond Index, which represents the broad U.S. bond market. Just by buying this single fund...

Dividend Stocks versus High Yield Bonds

Investors know that stocks are very different from bonds. But due to the persistent low interest rate environment, aging investors have more and more turned to both dividend stocks and high yield bonds as a source of fixed income for their retirement. Let’s take a look at how these two very different investments compare. Dividend Yield An investment in high yield bonds will almost always give you...

High Yield Bonds

Most investors are familiar with investment grade bonds: they’re IOUs from a company or government organization, with an agreed-upon interest rate (how much it will pay you) and maturity date (when it will pay you back your principal). What makes high yield bonds different is the lower credit quality of their issuers, as determined by various rating agencies. These bonds pay high yields to compensate inv...

Long-Horizon Robustness: Backtesting the Yieldstream Strategy from 1950 to 1984

On our performance page, we present live and backtested results for the Yieldstream strategy beginning in 1984 — the earliest year for which a reasonably deep universe of high yield bond mutual funds is available. But the underlying market dynamics that our strategy exploits — credit cycles, mean reversion in yield spreads, and persistent momentum — are not artifacts of the modern era. They have been present in credit markets for as long as those markets have existed. To test this, we extend...

Best brokers for mutual funds commonly used by Yieldstream

The table below lists the bond funds used most commonly by the Yieldstream strategy since inception, and the best broker to use when purchasing a fund. Overall, the best online broker to use with Yieldstream is Charles Schwab. They provide access to the broadest range of available bond funds, and the most reasonable fees. (Note: we do NOT receive any compensation for recommending any brokers). We believe this information to be...

Trend-following in range-bound markets

We saw earlier how a simple trend-following strategy can capture most of the high yield market’s good times and miss most of its bad times, by switching out of high-yield bond funds and into lower volatility bonds when the going gets rough. The chart below shows this same trend-following strategy, using a 10-month Simple Moving Average (SMA), but this time we've applied it to a high-yield bond index. ...

Trend-following on high-yield bonds

Trend-following is an active investment strategy that works well on many different asset classes such as stocks, bonds, real estate, commodities, and currencies. The effectiveness of trend-following is supported by academic and practitioner research, published in hundreds of papers and investment books over the past decades. We won't attempt to summarize the trend-following literature, but encourage inve...

Actively managed high-yield bond strategies

The high yield bond market has a long history of successful actively managed strategies. We first learned about high yield investment models from a professional money manager with hundreds of millions of dollars under management, who has managed client money in high yield bond strategies since the early 1990s. Actively managed high yield strategies have been used for decades. Original high yield market timers used very simple strategies. For example, some looked for a penny…

Investing in high yield bonds, or: Why we like junk!

We’ll take a look at how investing in high yield bonds compares to investing in U.S. stocks. High yield bonds, also known as junk bonds, are often associated with negative connotations: Credit risk. Defaults. Older investors may remember the scandal surrounding Michael Milken (a.k.a. the Junk Bond King). Asset allocation gurus often discourage investing in corporate bonds (including high yield) altogethe...

Risk and returns in bond investing

Many investors operate under the mistaken assumption that bonds offer a steady return and are less risky than other asset classes like stocks and real estate. Most financial advisors also recommend that their clients invest in bonds in order to reduce the volatility and risk of their portfolio. For the most part, this has worked well during the past 30 years. Between 1980 and 2010, the annualized rea...