Better Than Equities? High Yield Bonds’ Historical Risk and Returns

Posted on February 3, 2021

Since their rise in popularity during the 1980s, high yield, or below-investment grade, corporate bonds have provided the necessary financing for a large number of companies around the world. At DDJ, we believe that many investors have overlooked the benefits of maintaining a structural allocation to this asset class. Over the long-term, high yield bonds have offered very attractive risk-adjusted returns, with low correlations to both equities and “core” fixed income products.

This blog is an excerpt of a recent white paper we published titled Three Reasons to Invest in High Yield Bonds. Interested in reading further? Download the full whitepaper below (originally published in December 2020).

DDJ believes many investors are not aware of how well high yield bonds have performed on a risk-adjusted basis throughout the past three decades. Observe the exhibit below, which illustrates the annualized returns, standard deviation, and Sharpe ratio for three asset classes over the last 30-years: high yield bonds, large cap stocks and small/mid cap stocks.

Risk Adjusted Returns
High Yield Bonds, Small Cap Equities and Large Cap Equities
10/1/90 - 11/30/20 (30-Years)


ICE BofA US High Yield1, Russell 20002, S&P 5002, Annualized Returns, Standard Deviation3 and Sharpe Ratio4

As displayed above, the high yield market, as represented by the ICE BofA U.S. High Yield Index, has generated strong total returns over the last 30 years with significantly less volatility than both large cap U.S. equities, as represented by the S&P 500 Index, and small/mid cap U.S. equities, as represented by the Russell 2000 Index. This combination of strong total returns alongside lower volatility has resulted in high yield bonds exhibiting a superior Sharpe Ratio over the period.

In addition, DDJ believes that the high yield market possesses structural inefficiencies that can be exploited through rigorous, bottom-up fundamental research and a risk management process focused on minimizing credit losses. As a result, in our view, high yield is an asset class in which a skilled active manager can generate significant and sustainable outperformance over the long-term, resulting in the potential for returns in excess of the high yield index returns listed above.


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Past performance is not guarantee of future returns.

1Source: ICE. The ICE BofA U.S. High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofA U.S. High Yield Index data referenced herein is the property of ICE Data Indices, LLC, its affiliates (“ICE Data”) and/or its Third Party Suppliers and has been licensed for use by DDJ. ICE Data and its Third Party Suppliers accept no liability in connection with its use. Please contact DDJ for a full copy of the Disclaimer.

2The S&P 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value. Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 index. The index data is used for comparative purposes only. The Bloomberg Barclays US Aggregate Bond Index is a broad-based, market capitalization-weighted index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

3Standard Deviation: For each index, it measures the degree of variation of returns around the average return.

4Sharpe Ratio: For each index, the Sharpe Ratio measures return relative to its risk. The return (numerator) is defined as the incremental average gross return over the risk-free rate. The risk (denominator) is defined as the standard deviation of gross returns.


DDJ Capital Management is a privately held investment manager for institutional clients that specializes in investments within the leveraged credit markets. Since our inception in 1996, DDJ has sought to generate attractive risk-adjusted returns for our clients by adhering to a value-oriented, bottom-up, fundamental investment philosophy.  DDJ has extensive experience investing in securities issued by non-investment grade companies within the lower tier of the credit markets, including high yield bonds, bank loans and other special situation investments.

The information and views expressed herein are provided for informational purposes only, and do not constitute investment advice, are not a guarantee of future performance, and are not intended as an offer or solicitation with respect to the purchase or sale of any security. The inclusion of particular investment(s) herein is not intended to represent, and should not be interpreted to imply, a past or current specific recommendation to purchase or sell an investment. Any projections, outlooks or estimates contained herein are forward-looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Investing involves risk, including loss of principal. Investors should consider the investment objective, risks, charges and expenses carefully before investing with DDJ.

Past performance is not guarantee of future returns.