The case for US high yield

Early in the year, the US high yield market came under pressure from increasing Treasury yields, and then spread volatility led to a sell-off as a response to rising inflation and geopolitical concerns. While high yield is not immune to an economic downturn, most of the damage has already been done, says New York Life Investments in a recent post.

“Solid fundamentals, low dollar prices and a supportive technical backdrop make high yield worth a look,” writes Adam Schrier, Director of Product Management, at New York Life Investments.

The investment management firm notes that the percentage of ‘CCCs’ in the market has decreased over time, indicating an overall increase in the quality of the asset class. Additionally, NY Life cites JP Morgan’s forecast that the default rate will come up to 1.25% in 2022 and 1.75% in 2023, much below the long-term average of 3.2%.

As volatility has increased, issuances have fallen this year. New York Life Investments notes that there were quite a few rising stars whose high-yield bonds got upgraded into investment grade. “Due to both light supply and rising star expectations, the market may continue to contract which is supportive of high yield from a technical standpoint,” writes Schrier.

The investment management firm closes the report by saying that market dislocations create opportunities, especially now that issuers are going into an uncertain environment. New York Life Investments says the high yield market can potentially provide a favourable investment outcome.

Read the full insights report here.