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Not all high yield is created equal
Flavio Carpenzano
October 20, 2023
The high yield bond market has matured from its humble beginnings and is now a diverse $1.793bn1 marketplace for companies to achieve their capital financing needs. As it has matured, its credit quality has also increased. Today, nearly half of the high yield market is classified as BB – the highest quality credit rating. At the same time, the proportion of the weakest credits has also reduced.
The BB rated component of the high yield market has increased, as CCC has fallen
Source: Bloomberg. Exposures are calculated using the index amount outstanding of the ratings sub-indices, being Bloomberg Ba US High Yield Index for the BB-rated weighting and the Bloomberg Caa US High Yield Index for the CCC-rated weighting.
Five factors have contributed to the improvement in its credit quality.
1. A shift in LBO and M&A funding to the leveraged loan market.
2. An increase in fallen angels during the pandemic.
3. A more diversified market with a lower allocation to a higher quality energy
sector.
4. The removal of weaker credits from the market.
5. Prudent management of maturity walls by high yield issuers.
The rise in credit quality means there is now a much wider pool of high quality names in which to invest. Furthermore, thanks to the rise in yields that has occurred across the high yield market, attractive returns can now potentially be sourced in such bonds. The high level of yields now available, and the relatively low correlation to more interest rate sensitive areas of the bond market, mean that high yield can help to diversify income within a multi-sector income strategy. In addition, starting yields of around 9% mean that high yield can now deliver high single to low digit returns over the long term. Appreciating these developments gives investors the chance to exploit a broad range of investment opportunities that can potentially help them to achieve a durable source of income.
1. As of 30 September 2023. Market value of the Bloomberg Global High Yield Corporate index
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