Although earnings growth may be slowing, corporate balance sheets remain in good shape, with generally low levels of debt. Over the past several years, these healthy fundamentals have translated into higher average levels of quality and fewer defaults within the investment-grade corporate, high-yield and securitised credit sectors.
Outside of the US, economic fundamentals among most emerging markets are still strong as well, as EM growth rates continue to exceed their developed markets counterparts.
Taken together, these US and EM fundamentals provide a strong foundation for continued high income among many sectors of the bond market. But with the risk-on sentiment 2025 has generated so far, spreads across many of these sectors have approached or exceeded their tightest levels in the past decade. As a result, these spreads have led some fixed income investors to be concerned that many sectors have become expensive.
While these concerns are understandable, a closer look at high yield, investment-grade corporates, EM and securitised credit reveals that starting yields in these sectors are still above 10-year averages, indicating that income levels within these sectors remain very attractive.
Given the average duration of these sectors, we believe these high starting yields may persist for some time. Fortunately, these high starting yields also provide a cushion against negative total returns should spreads eventually widen to more historically average levels.
In addition, investors who have typically generated most of their portfolio income through dividend-paying stocks may be surprised to learn that the yield to worst on the US investment-grade (IG) (BBB/Baa and above) and high-yield (BB/Ba and below) sectors currently exceeds the S&P 500 Index earnings yield. This indicates that income-oriented investors are not earning a risk premium for owning equities.
