Before getting into which high yield bonds to buy, know this:
"We're waiting to see on what the Fed says, how the trade situation turns out," said Michael Kushma, chief investment officer for Global Fixed-Income at Morgan Stanley Investment Management. Even after the Fed speaks, the rate hiking path for 2019 won't be entirely clear until closer to February or March. If the Fed is aggressive, that would put pressure on credit. And credit is the thing to consider when buying high yield bonds, which are less sensitive to interest rate risk. Also, see how trade impacts yields here.
- Jim Cramer's Thoughts on the Market Ahead of the Fed and Micron's Earnings
- One Key Trend Investors Should Know Ahead of the Fed
- Listen for These Words from Federal Reserve Chairman Jerome Powell
Here's the good news: "The economy is strong and credit fundamentals are good....Defaults are now at multi-year lows," Kushma said. Meanwhile, high yield bond prices have fallen this year, and those bonds can yield over 7%, against inflation of just above 2%. "It's a reasonable alternative to equities," Kushma said.
Some of the best yields can be found in the energy sector, but as the chances of a recession increase, investors need to watch credit quality on those bonds.
- Jim Cramer: Get Ready for a Wild Ride on This Fed Rate-Hike Day
- Is a Big Rally on a Dovish Fed Too Obvious to Work?