High-yield bonds beat stocks during expansion

American_flagHigh-yield bonds typically generate higher returns than equities in the first year of an economic expansion, according to research by Martin Fridson, global credit strategist at BNP Paribas Asset Management.

If he is right, investors should buy US high-yield bonds because the US economy entered expansion in the first quarter of this year, according to Fridson's calculations. This is defined as the period after GDP exceeds the peak it attained during the previous economic cycle.

In four historical cases, the BofA Merrill Lynch US High Yield 100 index beat the S&P 500 in the first year of an economic expansion. In 2002, it returned modest positive growth of 0.13% compared with a loss of 22.09% on the S&P 500. In 1992, it hit 21.15% growth, roughly three times the growth seen in the S&P index that year.

“It is easy to understand why investors would guess that stocks are the better play in an expansion,” said Fridson. “It just does not happen to be supported by the facts.”

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