One of the biggest surprises this year has been the strong performance across the high yield bond and loan markets. While that was partly due to high yield’s shorter duration/ lower interest rate sensitivity, it was also a result of the lack of negative catalysts. As we expected, the wave of defaults that some were expecting at the start of the year have not transpired, and the ‘higher-for- longer’ reality has been a tailwind for loans in particular, which are floating-rate. At the same time, downgrades have been manageable.

The big question, of course, is whether the strength can continue if the macro picture starts to worsen. A big part of the answer lies in the levels of current yield and return. Looking at the high yield markets, global loans have returned approximately 10% year-to-date and are currently yielding around 10%, while global high yield bond yields are up about 6% year-to-date, with yields around 9%. Yields at these levels should offer a substantial cushion in the event of a meaningful economic slowdown.

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