This favourable trend is rooted in a notable confluence of solid fundamentals, low default risk, and strong performance relative to equities in volatile markets. In addition to their capacity as a yield- producing mainstay, high-yield bonds can help investors optimize portfolio diversification given their resilience during periods of equity decline. The asymmetrical return profile of high yield, when compared to equities (see chart), demonstrates the capture of a considerable portion of positive market gains but only a limited portion of equities’ downside volatility, historically providing equity like returns without the equity like volatility over the full market cycle.

Strong Fundamentals Fuel Investor Appetite

Today’s high-yield market offers higher credit quality than a decade ago, a consequence of the improved fundamentals which further support the case for a lower expectation of defaults vs historical averages. As of June 30, 2024, more than half of the high-yield market (51%) consisted of BB-rated bonds (up from 41% 10 years ago), with 37% B-rated, and 11% CCC-rated bonds (compared to 41% and 17% respectively 10 years ago)1. Furthermore, the size of the market, regarding the number of bonds in the high-yield universe, is at an all-time high.

The Portion of the Market in Distress is Low

While current rates on high-yield bonds are high, we expect default rates to be low. As a consequence of strong fundamentals and strong corporate balance sheets, the high-yield market’s default outlook is notably benign. Treasurers continue to make tremendous progress in pushing out their maturity profile, thereby reducing near-term risks. In general, markets are open for most companies, and as a result, corporate distress levels remains low.

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