In the current investment landscape, numerous challenges are influencing market dynamics. Despite potential headwinds, high-yield bonds appear well-positioned to navigate these challenges for four primary reasons, as per Barings. 

Firstly, the asset manager points out that the high-yield market is of higher quality than historical norms. “The companies in the high-yield market today are also larger and more globally diversified relative to history and include well-recognized names like Rolls-Royce, Vodafone, and American Airlines,” writes Sean Feeley, Portfolio Manager, US high-yield at Barings. 

Secondly, Feeley informs that the yields and prices of high-yield bonds are currently attractive compared to recent years. Following a significant repricing in 2022, bond yields have doubled to near double-digit levels. This unique combination of high yields and discounted prices provides a cushion against potential credit losses and reflects strong capital appreciation potential, he adds. 

Thirdly, the asset manager highlights that high yield doesn’t necessarily require strong economic growth to perform well. “Rather, what matters most in high-yield is an issuer’s ability to continue to meet the interest payments on its outstanding debt obligations,” says Feeley. 

As for the fourth reason, the asset manager contends that the technical backdrop of the high-yield market is supportive. The record level of rising stars (companies upgraded from high-yield to investment grade) in 2022 and continued activity in 2023 has led to a contraction of the high-yield market. 

“Exacerbating this supply/demand imbalance, new issuance this year has remained relatively muted, with the majority being used for refinancing activities. Coupled with the fact that M&A is down roughly 40% year-over-year—after what was arguably a lacklustre 2022—there is virtually no new supply coming into the market,” says Barings. 

“This strong technical has been a strong positive for high-yield and, given the shallow pipeline and large cash balances on the sidelines, should persist going forward,” adds the asset manager. 

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