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Though high-yield bonds posted above-average returns of about 17% in 2016, it doesn’t mean the asset class will stagnate this year. Rather, the return at the end of the next three- or four-year period should be around 6%.

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In a period where high-yield outperformed U.S. equities, “there are some critics that are arguing that 2016 just borrowed returns from 2017, and 2017 will be a lacklustre year,” says Nicholas Leach, vice-president of global fixed income at CIBC Asset Management and lead manager of the Renaissance High-Yield Bond Fund. “We disagree with that view; the evidence shows that if anything, 2016 stole returns from 2015.”

Read: Fixed income prospects for 2017

High-yield had a rare negative year in 2015, he says, down 5%. “Interestingly enough, if you annualize the return over that two-year period, the return is 6%, and that’s just about equal to what the current yield of the market was at the beginning of the period. And [2015-2016 was] one of the most volatile periods within the capital market space over the last 40 years.”

A similar pattern occurred during another volatile time: the financial crisis. “We were down double digits in 2008 [and] up double digits in 2009, but over that two-year period the total return was approximately equal to the coupon at the beginning of the period,” Leach recalls.

Heading into 2017, he says investors should expect the pattern to continue. The next period should see high-yield returns about equivalent to current coupons. “There might be some short-term volatility from one year to the next, but […] when we look at a three-year return or four-year return, it’s always equal to that coupon at the beginning of the period.”

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The beginning of 2017 saw a high-yield coupon of about 6%, Leach says, “and our coupon right now is around 5.75%. So we would expect that those are the types of returns investors can expect over the medium term.”

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Originally published on Advisor.ca

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