Widening the Gap: High Yield Bonds and Market Dispersion

Amid economic challenges, increased dispersion in high yield bonds suggests opportunities for selective investment choices versus broad sector-based strategies.

The market for high-yield bonds is currently experiencing a wider dispersion between its highest and lowest-yielding securities. This trend reveals significant disparities in individual bond performances, presenting opportunities for targeted investment choices rather than broad, sector-based strategies. As we look ahead, precise and active management will play a crucial role. Let’s take a closer look.

The CCC segment of the bond market, known for its lower credit rating, has driven the returns year to date. This surge in performance coincides with improved access to the primary market, particularly for stressed market segments, with the supply for the year projected to double. Even with significant debt maturing soon, it’s predominately in the hands of solid BB and B issuers, making it less of a concern.

While some investors might view the increased bond supply as a potential challenge for high-yield investments, distinguishing between gross and net supply reveals a more nuanced picture. The majority of this year’s high-yield market activity, approximately 83%, has been focused on refinancing, continuing the record pace set in 2020 and 2021. This indicates a controlled approach to new debt issuance, with the market efficiently absorbing what is a relatively limited influx.

With current geopolitical tensions, commodity prices have been on the rise. High energy prices can strain margins for the overall economy. Still, the high yield market is well-positioned due to its significant exposure to the energy sector compared to other asset classes. With an energy weighting of almost 12% in high yield bonds, compared to 6.34% in investment-grade bonds and 4.13% in the S&P 500, the high yield market is somewhat insulated from the broader economic impact of high energy prices.

In closing, with the high-yield bond market experiencing increased dispersion, the CCC segment has been a source of excess returns. This development suggests that investors may want to focus on low net supply of bonds. Additionally, the economic pressures and geopolitical uncertainties impacting commodity prices further emphasize the resilience and potential within high yield bonds and highlight the importance of active management in today’s rewarding environment.

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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