Why High-Yield Bond Funds Are Poised for a Comeback Amid Shifting Trade Policies

The high-yield bond market, once rattled by fears of a trade-war-induced recession, has staged a notable recovery in 2025. Funds like the BlackRock High-Yield Bond Fund (BRHYX) and Vanguard High-Yield Corporate Bond Fund (VWEAX) have rebounded sharply from early-year lows, with their resilience offering clues about their potential in a still-volatile economy. As trade tensions ease and markets recalibrate, these funds present a compelling case for investors seeking yield and diversification—provided they pay attention to cost structures and risk management.

The Rebound: High-Yield Funds Shake Off Early-Year Slump

The first quarter of 2025 was rocky for high-yield bonds. Fears of a U.S.-China trade war, triggered by new tariffs proposed in January, sent equities and risk assets tumbling. High-yield bonds, which often move in tandem with stocks due to their sensitivity to economic health, followed suit. By April 7, BlackRock's BRHYX had a year-to-date return of -2.0%, while Vanguard's VWEAX dipped to -0.4%.

But as trade negotiations began to thaw, the tide turned. By May 19, BRHYX had clawed its way to a positive 2.7% return for the year, while VWEAX surged to 3.0%. Both outperformed intermediate-core bond funds, which averaged just 1.8% for the period.

The June data, though less granular, reinforces the trend. BlackRock's fund closed at $7.11 on June 6, maintaining a narrow trading range between $7.09 and $7.12 since early June, while Vanguard's VWEAX stabilized around $5.47. Though these are modest gains, they signal stability in an uncertain environment.

High-Yield Bonds and Equities: A Tight, but Manageable, Relationship

The correlation between high-yield bonds and equities remains a critical factor for investors. BlackRock's fund, which holds a higher share of speculative-grade debt and some equities, has a correlation coefficient of 0.7 with the S&P 500, meaning it moves broadly in sync with stocks. This can amplify gains in bull markets but also expose investors to equity-like volatility.

Vanguard's fund, by contrast, prioritizes quality, with only 5% of its portfolio in CCC-rated debt (half the peer average). This approach reduces equity correlation—its coefficient with the S&P 500 is closer to 0.5—but sacrifices some upside during bond rallies.

For investors seeking diversification, this distinction matters. A portfolio with both funds could balance equity-linked income (via BlackRock) and more stable returns (via Vanguard).

Expense Ratios: A Lifeline in Low-Yield Markets

Costs are a silent killer of long-term returns, and high-yield funds are no exception. Vanguard's VWEAX, with its Silver Morningstar rating, benefits from low expense ratios (likely under 0.10%) and a conservative strategy that avoids overexposure to risky debt. BlackRock's BRHYX, while actively managed and flexible, carries higher fees—its expense ratio is estimated to be over 0.50%—which can eat into gains, especially in low-yield environments.

The lesson here is clear: In a market where yields are compressed, every basis point counts. Investors chasing high-yield exposure should prioritize funds that combine quality holdings with low fees.

Trade Policy's Role: From Sword to Shield

The recent rebound underscores how trade policy can be both a threat and an opportunity. The initial tariff scare in early 2025 sent high-yield spreads (the extra yield investors demand for holding risky bonds) soaring, but as negotiations reduced uncertainty, spreads tightened again. This dynamic suggests that high-yield bonds could thrive if trade tensions continue to ease—a scenario many analysts now expect.

BlackRock's 2025 capital market assumptions highlight the appeal of high-yield debt in a “lower-for-longer” rate environment. The firm advises investors to overweight short-term bonds and underweight long-term Treasuries, while maintaining exposure to high-yield corporates. Vanguard's conservative approach, meanwhile, aligns with its long-term focus on capital preservation—a valuable trait in uncertain times.

The Bottom Line: Re-Engage, but Strategically

High-yield bond funds are far from a “set it and forget it” investment, but their recovery this year argues for renewed interest. Investors should:
1. Prioritize low-cost, quality-focused funds like Vanguard's VWEAX to minimize expense drag.
2. Diversify with actively managed funds like BlackRock's BRHYX for potential upside in select sectors.
3. Monitor trade policy closely, as any escalation could reignite volatility.

The data is clear: High-yield bonds have proven their resilience when macro risks subside. With trade tensions easing and yields still above historical lows, now may be the time to revisit this corner of the market—provided you pick the right funds to weather the next storm.