AllianceBernstein (AB) Senior Vice President and Director of Income Strategies Gershon M. Distenfeld speaks during a press conference held in Seoul, Friday. Courtesy of AllianceBernstein (AB)

Investors should not miss the opportunity to invest in global high-yield bonds before the start of the interest rate cut cycle by the U.S. Federal Reserve, global asset manager AllianceBernstein (AB) said Friday.

High-yield bonds are corporate bonds that pay higher interest rates because of their lower credit ratings compared to investment-grade bonds.

Gershon M. Distenfeld, AB's senior vice president and director of income strategies, highlighted that it would be an effective strategy to diversify portfolios by allocating some portion of stocks to high-yield bonds, considering a strong global credit market outlook as well as relatively limited upward potential movements in equities.

"Most companies in the post-COVID world did not level up their balance sheets. They did not make acquisitions, buy back shares or ramp up capital expenditures. Instead, they turned down and paid down debt. As a result, the quality of the market is really high; ratings have never been higher," Distenfeld said during a press conference held at the FKI Tower in Seoul's financial district Yeouido, Friday.

According to Distenfeld, the composition of the credit market is really strong with about 12 percent more BBs and fewer triple Cs, and the market's fundamentals are healthy enough to fully digest potential default cases in high-yield bonds.

AllianceBernstein (AB) Senior Vice President and Director of Income Strategies Gershon M. Distenfeld speaks during a press conference held in Seoul, Friday. Courtesy of AllianceBernstein

The U.S.-headquartered global asset manager's income director emphasized that historically, the high-yield market has almost always offered a starting yield, if investors stay in the market over a five-year period, which is "true even in inflection points of the market."

"Look at May 2007 when spreads were at their tightest, and you're about to experience a 30 percent drawdown. Still, if you held for five years from the middle of 2007 to the middle of 2012, you earned your yield; you earned your 7.5 percent," he said.

He explained that despite returns from the high-yield bond market ranging from about 6 percent to over 20 percent, depending on the starting and ending points of an investment, on average, the high-yield bond market has generated returns that are comparable to U.S. stock markets. He also stresses that the global high-yield bond environment is more favorable than U.S. high-yield bonds for now.

The income strategies director advised investing in high-yield funds before the Fed's interest rate cuts can lead to higher returns. He explained that investing in global high-yield bonds three months before the first interest rate cut yields an annual return of about 9.2 percent, whereas investing at the time of the first interest rate cut yields an annual return of 8.1 percent.

As to the timing of the interest rate cut, he expected that the first rate cut would most likely occur in the second half of this year. But he added that it is also possible that the interest rate cuts may be delayed until next year, roughly quantifying that he views there is about a 50 percent chance for the first interest rate cut to come in the second half of this year, a 30 percent chance of no interest rate cuts this year and about a 20 percent chance of interest rate cuts occurring even earlier than expected.