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.

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 fixed income. 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.

BB-rated bonds 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 high-yield credit 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 strategic security selection and practical portfolio construction.

*Source: EPFR

Meet Your Expert

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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