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High Yield Action

Taking a tactical approach to “junk” bonds

Yield-hungry investors eyeing an eventual Fed rate cut are moving into high-yield corporate bonds these
days, a show of confidence that the strong economy will support these companies’ ability to honor their debt
obligations. Consider that corporate bond sales broke previous records in both January and February.

This robust demand for so-called “junk” bonds has pushed their prices higher and yields lower. In fact, the
difference between yields on high-yield bonds and comparable Treasury bonds—known as the spread—has tightened to just 3.13 percentage points, its lowest level since early 2022 (see the chart).

Bloomberg U.S. Corporate High Yield Index

Source: Bloomberg, as of 03/08/24. It is not possible to invest directly in an index.

Although that movement probably limits high-yield bonds’ capital appreciation potential, for now, the bonds’
average yield of nearly 8% remains attractive. And given the economy’s strength, we see no immediate
catalyst for high-yield bonds to sell off and their spreads to widen significantly.

That said, spreads are more likely to widen from here than become even tighter. We believe a tactical
approach to the high-yield bond space makes sense in this environment—maintaining an exposure but
being positioned to quickly reduce that allocation if recent market trends reverse course.

What’s more, other areas of the fixed-income market currently offer attractive yields along with greater
capital appreciation potential—including emerging market debt, preferred stock, and convertible bonds.
Given the historical volatility often seen in those sectors, however, we believe a tactical and dynamic
investment approach is wise.

This commentary is written by Horizon Investments’ asset management team. Past performance is not
indicative of future results. Nothing contained herein should be construed as an offer to sell or the
solicitation of an offer to buy any security. This report does not attempt to examine all the facts and
circumstances that may be relevant to any company, industry, or security mentioned herein. We are not
soliciting any action based on this document. It is for the general information of clients of Horizon
Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into
account the particular investment objectives, financial situations, or needs of individual clients. Before acting
on any analysis, advice, or recommendation in this document, clients should consider whether the security
in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. All investing involves the risk of loss.

The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate
corporate bond market. It is not possible to invest directly in an index. References to indices, or other
measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change The investments recommended by Horizon Investments are not guaranteed. There can be economic times when all investments are unfavorable and depreciate in value. Clients may lose money. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The opinions expressed herein are our opinions as of the date of this document. These opinions may not be reflected in all of our strategies. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent. Forward-looking statements cannot be guaranteed. Other disclosure information is available at Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC©2024 Horizon Investments, LLC.

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