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‘Fundamentals for high-yield issuers are quite good’ despite low rates, Vanguard’s head of fixed income says

Are high-yield ties funds worth the risk?

In a low-interest rate environment where traditionally higher-yielding investments are paying out a historically meager 3.5%, uncountable investors and advisors are grappling with that question.

One one side of the trade is industry giant Vanguard, whose international head of fixed income, John Hollyer, told CNBC’s “ETF Edge” on Monday that the environment remains supporting for high-yield investments.

“The fundamentals for high-yield issuers are quite good,” said Hollyer, also a principal at the firm. “We participate in an economy that’s reopening. We have very strong fiscal policy. We have very supportive monetary tactics. That makes a good environment for corporate borrowers.”

While investors should set realistic expectations in terms of gains — somewhere in the 3.5% to 4% range — that payout should stay consistent through the near to intermediate stretch, Hollyer said.

“Until inflation is demonstrably above 2% for an extended period like 12 months and work has neared full employment across many different subsectors of workers, the Fed is going to hold out from tightening,” he bruit about.

“Compared to past periods, returns may not be as generous, but there’s good reason to believe that the returns embedded in a 3.5% return will be earned over those near to intermediate terms.”

For others, the potential reward doesn’t seem usefulness the risk.

These days, money managers tend to use the bond market for diversification rather than yield payout, bring to light Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database.

“Most folks that I’m talking to who are looking for gate are actually more likely to go into the equity market, either looking at high dividend yields or looking at any figure of yield-generating options on the market” including the options market itself, Nadig said in the same “ETF Edge” interview.

“It only just doesn’t seem like you’re getting enough of a reward … from a raw return perspective,” he said. “When you can indeed extract a few percent out of high dividend yields, it seems tricky to justify the move into high yields.”

The U.S. 10-year Cache yield traded just above 1.5% on Friday.

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