2024 Outlook Public Fixed Income
With heightened uncertainty and widespread risks blurring the outlook, our investment professional explores the future prospect for the global high yield asset class.
Matt Livas: There is a lot of uncertainty in the world today—are we are headed into a recession, and how long or severe might it be? What will interest rates do going forward? Against this backdrop, what has the high yield market surprised you most over the past year and how do you see those dynamics playing out in the next 12 months?
Brian Pacheco: Looking at the high yield markets, one of the biggest surprises this year has been the performance across loans and bonds. While that was partly due to high yield’s shorter duration/ lower interest rate sensitivity, it was also a result of the lack of negative catalysts. As we expected, the wave of defaults that some were expecting at the start of the year have not transpired, and the ‘higher-for-longer’ reality has been a tailwind for loans in particular, which are floating-rate. At the same time, downgrades have been manageable.
The big question, of course, is whether the strength can continue if the macro picture starts to worsen. Part of that answer lies in the levels of current yield and return. Looking at the U.S. high yield markets, loans have returned approximately 10% year-to-date and are currently yielding around 9.5%.1 U.S. high yield bonds are up almost 5% year-to-date, with yields around 9.5%.2 Yields at these levels may offer a substantial cushion in the event of a meaningful economic slowdown.
1. Source: Credit Suisse. As of October 31, 2023.
2. Source: Bank of America. As of October 31, 2023.