Bonds Shine Bright When Growth Slows

High-Yield Bonds Outshine Stocks in Slow-Growth Environments, Says Fund Manager

Amid a flood of economic data and market-moving headlines, the U.S. stock market continues to hover near record highs — even as confidence in the economy starts to waver. That contrast has prompted some investors to explore ways to reduce risk without giving up much return.

A recent analysis from AllianceBernstein portfolio managers William Smith, director of credit, and AJ Rivers, head of U.S. retail fixed-income business development, makes a strong case for high-yield bonds—often labeled “junk bonds”—as a strategic alternative for equity-heavy portfolios.

“Investors looking to remain in stocks but rotate out of higher-risk holdings typically look to rebalance into investment-grade bonds. Government bonds and high-quality credit have their place, but we believe high-yield corporate bonds warrant a closer look—particularly in today’s market,” the authors note.

A Surprising Track Record

Over the past 25 years, high-yield bonds (tracked by JNK) have delivered average annual returns of 7.6%, compared with the S&P 500’s 9.8%, but with nearly half the volatility. That balance of risk and reward makes them especially appealing in times of slow or uneven growth.

“By shifting a portion of their equity holdings into high yield, investors could meaningfully reduce their overall volatility while conceding relatively little in return,” Smith and Rivers write. “With elevated yields and slower economic growth, the relationship between high yield and equities may be even more compelling today.”

Why High Yield Shines in Slow Growth

Historically, high-yield bonds have tended to outperform equities during low-growth periods, when high stock valuations often translate into weaker future returns. With global demand cooling and trade activity softening, AllianceBernstein argues this could be an opportune moment to increase exposure to high yield.

The Catch: Two Key Risks

However, the strategy isn’t without potential pitfalls.

1. Recession risk: If the U.S. economy slips into a downturn, high-yield bonds could suffer. During the 2008 financial crisis, they fell about 5%, and during the 2020 pandemic, they declined 8%—better than equities, but still painful compared to gains in government bonds.
2. Growth surprise risk: If the economy accelerates—perhaps fueled by AI-driven productivity gains—high-yield investors might lag the broader market, as stocks regain the performance edge.

Bottom Line

For investors concerned about volatility but unwilling to retreat completely from risk assets, high-yield bonds may offer a middle ground—a blend of stability and return potential suited for a slowing economic backdrop.