How well do you understand yield? A guide for investors

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[ "Matt Steiger, CFA" ]
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Investors looking for income are often told to look at yield, but which one?

In addition to portfolio diversification, most investors consider bonds for the income that they provide. To understand that, investors can look at the yield. But there are many ways of quoting the yield on an investment, and they can vary based on a number of factors. For investors looking for income, knowing which yield measure to consider doesn't need to be complicated. Our short guide below shows why.


1 In the case of floating-rate securities, the distribution yield will reset based on market conditions.


How much can yields vary? In periods of high interest rate volatility, these measures of yield can diverge significantly: When rates started rising in 2022, yields that were backward-looking (TTM) or incomplete in the securities included (SEC yield) lagged and were unable to provide investors with an accurate indication of the current market environment.



Showing that when interest rate volatility started rising, beginning in March 2022, distribution on yield (3.0%) began lagging yield to worst (4.8%) and SEC yield (3.5%).
Source: Columbia Threadneedle Investments. Yields are representative of a core-plus fixed-income strategy.


What does it mean to you? Understanding how to interpret the different measures of yield can help investors in comparing investment options and making informed decisions about fixed income. And because yield is an important indicator of potential future total return, it can provide guidance on more than just income levels.


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