Financial assets around the world have had a rough ride in 2022 due to high inflation, tightening monetary policy and recession fears. While macro headwinds show no sign of abating, PineBridge Investments says credit fundamentals are still solid, especially in the US, and that investment in high-yield bonds needs to be optimized for volatility.

The investment management firm says that over the past decade issuers have reduced their overall debt and are cautious about credit quality. Additionally, earnings have bounced back past 2019 levels. PineBridge says that higher-quality BB-rated issuance currently accounts for 52% of the high-yield market, up from 35% in July of 2008.

The most recent earnings season saw companies reporting surprise profits and solid growth, as the companies successfully defended their margins despite high inflation. PineBridge expects earnings to decline in 2023, and that the macro environment will be challenging but not dire. “Even in a moderate recession scenario, we would not expect corporate default rates to move much above long-term averages, given the improvement in credit quality,” writes John Yovanovic, Portfolio Manager, Head of High Yield Portfolio Management, at PineBridge Investments.

While market volatility is expected to continue, PineBridge suggests investors should favour high-income assets. In this context, the investment manager sees US high-yield bonds to be attractively positioned with a much less expected risk compared to private equity, US cyclicals and US equities.

“Given that the average credit quality of the high yield market has improved and our view that valuations are adequately compensating for the credit risk against a relatively benign default backdrop, we view high yield as an attractive asset class in a diversified portfolio,” says PineBridge.

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