Why US high yield continues to surprise investors

KEY POINTS
The US high yield market has benefited from a healthy fundamental backdrop and resilient US economy.
Bond prices today remain discounted as the outlook for interest rates has been uncertain however that may be about to change.
With dispersion increasing, we believe that active management and prudent fundamental analysis are critical.

In 2023, many investors expected that the Federal Reserve’s (Fed) aggressive monetary policy tightening would lead to a potential recession and a pick-up in defaults in the high yield market. Given this backdrop, the broad market consensus was for investment grade to outperform high yield and, within high yield, higher quality BBs to outperform lower quality CCCs.

This consensus was wrong. Despite continued volatility in the US treasury market, the high yield market has benefited from a healthy fundamental backdrop and resilient US economy.  Against this backdrop, US high yield companies have, despite diverging trends across sectors and issuers, performed better than anticipated.

Technical factors have also remained very supportive and, over the last couple of years, the market has seen a wave of rising stars to investment grade. This has surpassed the number of fallen angels. Alongside this, there has been less new issuance in the primary market, creating high demand for new deals when they do come to market.

Looking across the high yield market, lower rated credit has outperformed higher quality in 2023 and 2024 year-to-date1  while shorter duration continues to outperform longer duration asset classes due to the inverted yield curve and continued rates volatility.

The US high yield market has outperformed investment grade, government bonds and cash over this time frame.

  • IFNvdXJjZTogQVhBIElNLCBCbG9vbWJlcmcgYXMgb2YgMjV0aCBKdW5lIDIwMjQ=

Is there still room to run from here?

Looking at previous cycles, the high yield market tends to bounce back strongly after a sell-off. This is because as bond prices recover and coupons reset at higher levels, the level of income that bondholders receive increases. This is reflected in the all-in yield, which in the US high yield market moved from around 4% in 2021 to 9% at the start of 2023 and is now around 8%.2

This most recent sell-off, however was unusual compared to previous ones. 2022’s sell-off and rise in yields was driven mainly by interest rate increases, not by credit spreads widening. This means that bond prices today remain discounted as the outlook for interest rates has been uncertain. That could now be all about to change as we expect the Fed to start moderately easing policy in the second half of 2024.

This means that there is still significant upside potential for the high yield market through a combination of higher income and continued bond price recovery. It is worth bearing in mind that rallies in high yield can happen very quickly: in the fourth quarter of 2023, the US high yield market delivered a 7% total return as the market priced in rate cuts, with the average high yield market dollar price increasing from $88 in September to $93 by year-end, where it currently remains.3  Timing such market moves can be challenging so, we believe, being invested is important to ensure participation in rallies, whilst also benefitting from the higher carry now on offer.

We expect high yield spreads to continue to be supported by broadly healthy corporate fundamentals. We also expect any potential spread widening to be met with buyers, providing further technical support.

That said, dispersion is increasing as high yield companies adjust to a higher rate environment. This is reflected in how little of the US High Yield index is trading at its average YTW level. As of 12th June 2024, ~70% of the index had a YTW between 0 and 7.5% and ~20% had a YTW greater than 8.5%, leaving just ~10% of the overall market with a YTW between 7.5% and 8.5% – the index’s average YTW range for the past year or so.4

We believe that active management and prudent fundamental analysis are critical to identify companies that are well positioned to pay coupons on a timely basis and pay back, or refinance, principal.

Over the long term, the high yield asset class has proven its ability to outperform other parts of the fixed income market. This is principally due to the attractive carry component that compounds through time. 

  • U291cmNlOiBBWEEgSU0sIEJsb29tYmVyZyBhcyBvZiAyNXRoIEp1bmUgMjAyNA==
  • U291cmNlOiBBWEEgSU0sIEJsb29tYmVyZyBhcyBvZiAyNXRoIEp1bmUgMjAyNA==
  • U291cmNlOiBBWEEgSW52ZXN0bWVudCBNYW5hZ2Vycy4gSW5kZXg6IElDRSBCb2ZBIFVTIEhpZ2ggWWllbGQgSW5kZXguIFBhc3QgcGVyZm9ybWFuY2UgaXMgbm90IGluZGljYXRpdmUgb2YgZnV0dXJlIHJlc3VsdHMu
US Debt Index Returns
*30th September 2001 – 31st May 20245

High yield also has the potential to compete with equities from a return perspective, but with less volatility.

Since the financial crisis 15 years ago, the high yield asset class has matured significantly in terms of the quality and diversity of companies that make up the market. Many of these companies are household names and global leaders in their lines of business, that feel very comfortable using the high yield market to access capital.

Due to these characteristics and developments, high yield has become much more of a core part of investors’ portfolios, attracting a wide range of investors across institutional, wholesale and retail segments.

As well as the high income available relative to other asset classes, investors are also attracted by the diversification qualities that high yield can offer within a balanced portfolio. With a risk/return profile that sits somewhere between the fixed income and equity markets, high yield can be used in a variety of different ways to suit different investor risk appetites and outlooks.

    Disclaimer

    Este documento tiene fines informativos y su contenido no constituye asesoramiento financiero sobre instrumentos financieros de conformidad con la MiFID (Directiva 2014/65 / UE), recomendación, oferta o solicitud para comprar o vender instrumentos financieros o participación en estrategias comerciales por AXA Investment Managers Paris, S.A. o sus filiales.

    Las opiniones, estimaciones y previsiones aquí incluidas son el resultado de análisis subjetivos y pueden ser modificados sin previo aviso. No hay garantía de que los pronósticos se materialicen.

    La información sobre terceros se proporciona únicamente con fines informativos. Los datos, análisis, previsiones y demás información contenida en este documento se proporcionan sobre la base de la información que conocemos en el momento de su elaboración. Aunque se han tomado todas las precauciones posibles, no se ofrece ninguna garantía (ni AXA Investment Managers Paris, S.A. asume ninguna responsabilidad) en cuanto a la precisión, la fiabilidad presente y futura o la integridad de la información contenida en este documento. La decisión de confiar en la información presentada aquí queda a discreción del destinatario. Antes de invertir, es una buena práctica ponerse en contacto con su asesor de confianza para identificar las soluciones más adecuadas a sus necesidades de inversión. La inversión en cualquier fondo gestionado o distribuido por AXA Investment Managers Paris, S.A. o sus empresas filiales se acepta únicamente si proviene de inversores que cumplan con los requisitos de conformidad con el folleto y documentación legal relacionada.

    Usted asume el riesgo de la utilización de la información incluida en este documento. La información incluida en este documento se pone a disposición exclusiva del destinatario para su uso interno, quedando terminantemente prohibida cualquier distribución o reproducción, parcial o completa por cualquier medio de este material sin el consentimiento previo por escrito de AXA Investment Managers Paris, S.A.

    La información aquí contenida está dirigida únicamente a clientes profesionales tal como se establece en los artículos 194 y 196 de la Ley 6/2023, de 17 de marzo, de los Mercados de  Valores y de los Servicios de Inversión.

    Queda prohibida cualquier reproducción, total o parcial, de la información contenida en este documento.

    Por AXA Investment Managers Paris, S.A., sociedad de derecho francés con domicilio social en Tour Majunga, 6 place de la Pyramide, 92800 Puteaux, inscrita en el Registro Mercantil de Nanterre con el número 393 051 826. En otras jurisdicciones, el documento es publicado por sociedades filiales y/o sucursales de AXA Investment Managers Paris, S.A. en sus respectivos países.

    Este documento ha sido distribuido por AXA Investment Managers Paris, S.A., Sucursal en España, inscrita en el registro de sucursales de sociedades gestoras del EEE de la CNMV con el número 38 y con domicilio en Paseo de la Castellana 93, Planta 6 - 28046 Madrid (Madrid).

    © AXA Investment Managers Paris, S.A. 2024. Todos los derechos reservados.

    Advertencia sobre riesgos

    El valor de las inversiones y las rentas derivadas de ellas pueden disminuir o aumentar y es posible que los inversores no recuperen la cantidad invertida originalmente.

    Volver arriba
    Clientes Profesionales

    El sitio web de AXA INVESTMENT MANAGERS Paris Sucursal en España está destinado exclusivamente a clientes profesionales tal y como son Definidos en la Directiva 2014/65/EU (directiva sobre Mercados de Instrumentos financieros) y en los artículos 194 y 196 de la Ley 6/2023, de 17 de marzo, de los Mercados de Valores y de los Servicios de Inversión. Para una mayor información sobre la disponibilidad de los fondos AXA IM, por favor consulte con su asesor financiero o diríjase a la página web de la CNMV www.cnmv.es

    Por la presente confirmo que soy un inversor profesional en el sentido de la legislación aplicable.

    Entiendo que la información proporcionada tiene únicamente fines informativos y no constituye una solicitud ni un asesoramiento de inversión.

    Confirmo que poseo los conocimientos, experiencia y aptitudes necesarios en materia de inversión, y que comprendo los riesgos asociados a los productos de inversión, tal como se definen en las normas aplicables en mi jurisdicción.