Against a backdrop of heightened uncertainty, what has surprised you most about high yield over the past year? And how do you see those dynamics playing out in the next 12 months?
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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