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Reportedly, U.S. high-yield bonds suffered their worst performance in four years in the third quarter. The Credit Suisse High Yield Bond Fund ETF slumped 12% from July 1-Sept. 30. The index is down 17.1% year to date. An article by Forbes points to a deluge of bearish commentaries about high yield, seconded by Wall Street strategists. Remember, positive indications of the U.S. Fed hiking rates dominated for most part of the third quarter; while finally the central bank decided against a rate hike in September. The worst performance in four years echoed the broader markets’ trend. The Dow, S&P 500 and Nasdaq declined 7.6%, 7% and 7.4%, respectively, giving their worst third-quarter performance since Sept. 2011. Just 17% of the mutual funds managed to finish in the green. This was a slump from 41% in the second quarter, which was again a sharp fall from 87% of the funds that ended in the positive territory in the first quarter. Coming to the high-yield mutual fund performance in the third quarter, these saw a dour sentiment prevailing. But for a handful of funds, the majority of high-yield mutual funds finished in the red. Gains were minute, as only one fund could post an above 3% return while all other gainers settled below 2%. The best gainer in the third quarter was The Fairholme Focused Income Fund (MUTF: FOCIX ), which added 3.8%. Catalyst High Income C (MUTF: HIICX ) was the biggest loser as it nosedived 20.5%. For most part of the third quarter, high-yield bond funds suffered outflows. In fact, in the last week of the third quarter, i.e. in the week ending Sept. 30, high-yield bond funds saw net outflows of $2.2 billion. As of Oct. 7, the year-to-date outflow for high yield bond funds was $5.2 billion. Of the 667 funds we studied, just 25 managed to finish in the green. However, these 25 funds had paltry gains with just one fund posting an above 3% return. For the other 24 funds, gains ranged from 0.01% to 1.6%. The average gain for these 26 funds was 0.5%. While one fund had a breakeven return, 640 funds ended in the red. The average loss for these 640 funds was 4.2%. Fed Rate Hike Dilemma The record low rate scenario makes dividend-paying funds attractive. Mutual funds paying high dividends assure a consistent stream of income opportunities; and thus are lucrative investment options in a low rate environment. However, there were indications that the Fed will hike rates in September and end a record-long low rate environment. In July, the FOMC’s two-day policy meeting gave no clear indication on the timing of the first rate hike. Nonetheless, the door for a September rate hike was kept open. However, in a testimony before Congress, Fed chair Janet Yellen said she expects the U.S. economy to strengthen and the central bank to hike interest rates “at some point this year.” In August, minutes of the FOMC meeting held on July 28 and 29 revealed that the majority of policymakers “judged that the conditions for policy firming were not yet achieved,” but noted that conditions were approaching that point. Federal Reserve Vice Chairman Stanley Fischer commented that a September rate hike was “pretty strong” before China devalued its currency. Finally in September, the FOMC cited a weak global growth scenario and low inflation rate as the main reasons for their decision to not hike rates in September. The Fed continues to wait for “further improvement in the labor market” and inflation to “rise to 2% in the medium term.” Separately, though the Fed raised its outlook for economic growth for this year, it trimmed projections for 2016 and 2017. However, Yellen later indicated that the lift-off option is very much on the table for later this year. She was also optimistic about the U.S. economy. Top 9 High-Yield Funds Fund Name Q3 Total Return Q3 % Rank vs. Obj YTD Total Return % Yield Expense Ratio Minimum Initial Investment ($) Load Great-West Bond Index (MUTF: MXBIX ) 1.6 1 1.36 1.77 0.5 0 N Guggenheim Total Return Bond A (MUTF: GIBAX ) 0.47 1 1.41 4.07 0.87 2500 Y American Century Core Plus A (MUTF: ACCQX ) 0.37 1 0.31 2.68 0.9 2500 Y Rydex Inverse High Yield Strategy A (MUTF: RYILX ) 0.2 2 -2.82 0 1.52 2500 Y Fidelity Strategic Advrs Core Inc (MUTF: FPCIX ) 0.18 2 0.35 2.96 0.07 0 N Aquila Three Peaks High Income Y (MUTF: ATPYX ) 0.15 2 2.54 3.56 0.94 0 N RidgeWorth Limited Duration I 0.04 3 0.12 0.16 0.34 0 N Sterling Capital Corporate Fund A (MUTF: SCCMX ) 0.04 3 0.6 2.6 0.85 1000 Y Guggenheim Limited Duration A (MUTF: GILDX ) 0.01 3 1.89 3.54 0.85 2500 Y Note: The list excludes the same funds with different classes, and institutional funds have been excluded. Funds having minimum initial investment above $5000 have been excluded. Q3 % Rank vs. Objective* equals the percentage the fund falls among its peers. Here, 1 being the best and 99 being the worst. As said, high-yield mutual funds could manage flimsy gains. In fact, beyond the tenth-placed Guggenheim Limited Duration A, which gained 0.01%, the other funds had negative returns. However, GILDX sports a decent yield of 3.5%. The other funds with a decent yield and in the best performers’ list are Guggenheim Total Return Bond A, American Century Core Plus A, Fidelity Strategic Advrs Core Inc. and Aquila Three Peaks High Income Y with yields of 4.07%, 2.68%, 2.96% and 3.56%, respectively. Here, GIBAX and FPCIX carry a Zacks Mutual Fund Rank #3 (Hold). The top performer Great-West Bond Index also carries a Hold rating. Separately, ATPYX sports a Zacks Mutual Fund Rank #1 (Strong Buy) while ACCQX holds a Zacks Mutual Fund Rank #2 (Buy). Original Post