Active and Total Reaching for Yield: Risk-Taking in Investment Grade Corporate Bond Mutual Funds

Sammanfattning

The tendency of increasing the riskiness of one's investment when interest rates drop is referred to as "reaching for yield". We study this phenomenon among U.S. investment grade corporate bond mutual funds. While we do find evidence of an inverse relation between interest rates and portfolio riskiness, consistent with funds reaching for yield, we find no evidence of it being caused by active trading decisions made by the fund manager. We further examine if expense ratios pressure fund managers to reach for yield in times of low or decreasing interest rates, to maintain a positive net return. Our analysis reveals a positive relationship between expense ratios and reaching for yield, but no evidence of expense ratios moderating how fund managers react to interest rates for the full time period. However, there is evidence of funds with higher expense ratios reaching for yield more in response to interest rate drops during 2019-2021, a period ridden by decreasing and later near-zero interest rates. There are no major differences between retail and non-retail funds or between index and non-index funds, with regards to reaching for yield.