Navigating High-Yield Credit Opportunities in a Resilient Market
High-yield credit is experiencing strong inflows and investor confidence, potentially offering attractive returns and reduced volatility compared to other risk assets.
- Portfolio Construction
- Fixed Income Insights
- High Yield
- Risk Management
Key Points
What it is
Our analysis examines high-yield credit opportunities, highlighting strong market inflows and investor confidence within a stable economic environment.
Why it matters
In the current market, high-yield credit offers attractive returns and reduced volatility compared to other risk assets, making it a compelling opportunity for investors.
Where it's going
Our evaluation suggests that the high-yield credit market is likely to experience ongoing expansion and resilience, fueled by strategic investment choices and improved corporate fundamentals.
Despite economic challenges and geopolitical concerns, the U.S. consumer remains resilient, strengthened by job creation, wage stabilization, and strong corporate fundamentals. While there are concerns about reduced spending among lower-income households, substantial job gains for this sector over the past two years have eased financial burdens, setting the stage for robust market activities and investment opportunities. Let’s take a closer look.
Primary market activity remains strong across asset classes, particularly in . Notably, we are not seeing increasing debt levels, as most new issuances are earmarked for refinancing. Management teams and treasurers recognize the high cost of debt and are focusing on organically enhancing fundamentals. Investor demand for high-yield credit is clear, with inflows this year, including a $6.7 billion inflow in May — the largest since last November.* This strong demand has exceeded supply, bolstering evaluations. As a result, high-yield credit remains a compelling choice for investors, offering strong total return potential alongside dampened volatility relative to other risk assets.
comprise about half of the high-yield market, so their performance significantly impacts the entire asset class. This year, investors increased their exposure to BB-rated bonds due to various risks, such as geopolitical, monetary, and fiscal challenges. The difference in spread between BB-rated and higher-rated bonds has narrowed, reflecting the growing confidence in BB-rated bonds. Even with the reduced spread premium, investors still favor BB-rated bonds for their potential to enhance portfolio construction and provide diversification benefits. Active management focused on bond selection and broader market strategies that take advantage of current trends are crucial for achieving risk-adjusted investment success. Furthermore, the financial health of companies issuing single-B bonds is improving, leading to rating upgrades and a positive outlook for this segment.
The market continues to offer attractive opportunities for investors. Even with inherent risks, the attraction of high yields and strong returns, coupled with lower volatility compared to other risk assets, remains significant. As companies strengthen their financial foundations, the market remains robust. Strong U.S. nominal growth supports a stable economic backdrop, allowing investors to explore opportunities with and practical portfolio construction.
*Source: EPFR
Fixed income is an asset class that pays a set payment over time. It includes government and corporate bonds, certificates of deposit (CDs), and other debt securities that pay a fixed interest rate until maturity.
High-yield credit primarily refers to debt instruments, such as bonds, that offer higher interest rates due to the issuer’s lower credit rating. They don’t typically include equities (stocks), as equities represent ownership in a company and do not involve fixed interest payments.
A BB-rated bond is a high-yield, speculative-grade bond with more credit risk than investment-grade bonds. While it offers the potential for higher returns, it also comes with an increased risk of default and price fluctuations.
Main Point
High-Yield Credit Offers Compelling Investment Opportunities
High-yield credit is experiencing strong inflows and investor confidence, offering attractive returns and reduced volatility compared to other risk assets. We explore how improving fundamentals, along with strategic selection, continue to drive growth in this asset class.
Resilient Consumers Support Growth
Eric Williams
Head of Capital Structure
Eric Williams is head of capital structure and a senior portfolio manager on the global fixed income team at Northern Trust Asset Management. He has broad oversight of our actively managed leveraged credit platform and is the lead portfolio manager on several leveraged credit strategies across the firm.
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