With economic growth beginning to slow, investors may be concerned about the potential impact on high-yield bonds, which have historically tended to be one of the first areas in capital markets to come under pressure. However, a look at high-yield issuance trends tells the story of a sector that’s showing few signs of late-cycle excesses.
High-yield issuance boomed in 2020 and 2021, as firms took advantage of low interest rates to refinance existing debt—extending maturities at the same time. So far in 2022, issuance is tracking much lower. Also, the amount of borrowing being used to return money to shareholders or to fund mergers and acquisitions is low relative to prior cycles, suggesting that issuers are taking a prudent approach.
Given their generally sound fundamentals, high-yield issuers appear much better positioned to navigate current challenges than in prior slowdowns. With yields and credit spreads at multiyear highs, the compensation for high-yield bonds seems particularly compelling—and yield has historically been a strong indicator of return potential. Of course, company-specific attributes make a huge difference, so investors should be particularly diligent in assessing businesses and selecting individual issuers.
For multi-asset investors, particularly income seekers, high yield seems like a sound portfolio building block. While we believe investors should be cautious with their overall risk-asset exposure, given the higher market volatility and deteriorating growth, high yield seems like a compelling fit within that segment of a portfolio.