Despite elevated uncertainty around inflation, rates and—more recently—the banking sector, high yield investors largely have stayed put and not succumbed to panic, as evidenced by the market’s wafer-thin volume and modest outflows from high yield mutual funds. Indeed, waiting out the turmoil seems to be the playbook for investors and issuers alike.

The uncertainty that pervades the high yield market is a continuation of the mood that has prevailed since the U.S. Federal Reserve began raising interest rates in March 2022. Since then, we have emphasised a focus on higher-rated issues and careful attention to market niches and credit selection. We have no direct high yield exposure to the banking industry in the U.S. and Europe, as the industry’s opacity regarding its balance sheet structure inhibits the thorough credit analyses we require before investing. Index exposure to banks is low (<1%) in U.S. high yield indices, however much larger in Europe at approximately 13%.

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