Four Reasons High Yield is More Resilient Today
The high yield bond market has undergone a fundamental shift over the last decade, with today’s higher-yielding, higher-quality market looking particularly resilient in the face of a potential downturn.
There is clearly no shortage of challenges shaping the investment landscape today. Optimism around the prospect of an economic soft landing seems to be fading, and a potential recession looms in what may be the not-so-distant future. The path of interest rates also remains uncertain, although consensus seems to be for a prolonged ‘higher-for-longer’ environment going forward. At the same time, geopolitical tensions continue to escalate around the globe.
While all these factors have the potential to weigh on markets in the months ahead, high yield bonds look particularly well-positioned to weather the impending storm—for four key reasons.
1. The Market is Higher-Quality
There is a common interpretation that high yield means high risk. But that is not necessarily the entire case—in fact, the quality of the market today is higher than it has been historically. More specifically, while Europe has historically been more of a BB-rated market, most U.S. high yield issuers today are BB-rated—a seismic shift from a decade ago. At the same time, the lowest-rated CCC issuers account for only 11% of the U.S. market today, versus over 19% 10 years ago and 17% 20 years ago1. The companies in the U.S. high yield market today are also larger and more globally diversified relative to history, and include global well-recognized names.
1. Source: ICE BofA. As of September 30, 2023.