Yield Chasing
The practice of seeking above-average income yields by taking on excessive credit, duration, or liquidity risk.
What is Yield Chasing?
Yield chasing is the practice of seeking investments that offer above-average income yields—such as high-yield bonds, dividend stocks, preferred shares, or leveraged closed-end funds—often by taking on significantly more credit risk, duration risk, liquidity risk, or use of leverage than the investor may fully appreciate. During periods of low interest rates, yield chasing can become widespread as investors accustomed to higher income shift into riskier assets to maintain their income levels. The risk is that the higher yield compensates for a higher probability of capital loss or dividend cuts, ultimately reducing total returns below those of safer alternatives when market conditions deteriorate.
Example
During the 2020–2021 near-zero interest rate environment, U.S. 10-year Treasury yields fell below 1%. Many income-focused investors moved into high-yield bond funds yielding 5–7%, or leveraged closed-end funds yielding 8–10%. When the Federal Reserve began raising rates aggressively in 2022, these instruments suffered significant capital losses, erasing years of income advantage for investors who had chased yield.
Source: FRED — 10-Year Treasury Yield