Global high yield bonds delivered for investors in 2024, but can that continue? Darius McDermott, managing director of FundCalibre and Chelsea Financial Services, looks at the market and talked to fixed income fund managers for their views.
With capital growth and income returns both in high single digits, global high yield bonds produced excellent returns for investors in 2024*.
This year also has the potential to be another positive one for the asset class. The big question is whether the income element will have to shoulder the burden – as concerns remain prominent about spreads widening and hitting capital returns hard.
Credit spreads are currently towards the lower (tight) end of their range, making a scenario for further tightening seem unlikely. Figures from Morgan Stanley show that at the end of 2024, the spread on US and European high yield stood at 310bps and 340bps respectively**. It is a trend that’s consistent across credit, including investment grade bonds. Figures from the ICE BofA Global High Yield Index typically place spreads for high yield at around 550bps***, although these are elevated due to periods of stark volatility – such as the Global Financial Crisis when spreads hit 2000bps. The reality is that spreads can stay at these tight levels for prolonged periods, particularly if there is economic stability.
There are reasons to suggest the economic backdrop is constructive, with high yield bond defaults remaining at relatively benign levels. Rating agency Moody’s recently forecasted an actual default rate of 2.8-3.4% this year, below the long-run average rate of 4%****.
Reasons for optimism
There is scope to see spreads remain at these tight levels, making a yield in excess of 7% an attractive one. The arrival of a pro-business US president like Donald Trump helps what is already a fairly constructive backdrop, with deregulation and tax cuts on the agenda. Europe’s economy has also had a strong start to 2025.
Research from Impax Asset Management points to four issues which weigh less heavily on the high yield market today, complicating historic comparisons. First, ‘maturity walls’, being high volumes of debt approaching maturity, are no longer as concerning as they were only a year ago. At the end of 2023, almost $500bn in bonds were due to mature in 2025 and 2026 across US dollar, Euro and emerging market high yield debt. By the end of 2024, this had fallen to $300bn, as strong primary markets have allowed many high yield issuers to review their near-term maturities^.
Secondly, the construction of high yield markets has moved towards higher quality issuers. For example, the highest quality high yield bonds (BB) accounted for 51% of the market in 2024 (it was only 41% 10 years ago); by contrast the proportion of CCC’s – the riskiest part of the market – has dropped from 17% to 11%. This affects the potential for defaults in this market^^.
The firm also points to the high yield market’s duration – a measure of interest rate risk – shortening from around four years to closer to three years. Finally, the high yield market has become more diversified by sector, protecting from individual shocks^.
Trump, inflation and an economic slowdown
High yield bonds are not immune from an economic downturn. Any meaningful slowdown will have an impact on equities, which historically have a strong correlation with high yield bonds. Trump’s inflationary policies – as well as tariffs – are more likely to be a threat over the shorter term.
Janus Henderson head of high yield Tom Ross says the level and extent of retaliation (to tariffs) will be important factors in how this affects corporate profits. He says: “Some of the mooted policies may be counterproductive; for example, relaxing regulations on oil and gas drilling could lead to lower earnings among some energy companies if higher volumes are offset by lower energy prices.”
Ross adds that there is a risk that companies bring forward issuance to the first half of 2025 to try and get ahead of any fallout from tariffs. Adding that the prospect that the Fed may not cut rates as much as hoped for by the markets could also lead to more indebted borrowers scrambling to secure finance. This could lead to greater dispersion in the market – something active managers thrive upon***.
Artemis Global High Yield Bond fund manager David Ennett says there are good reasons to believe spreads will remain tight in 2025, citing robust fundamentals and a strong technical backdrop. However, given the potential for downside surprise they are focusing on the front end, driving high levels of carry and targeting single-name opportunities as they present themselves.
Invesco Bond Income Plus (BIPS) manager Rhys Davies says although he is still optimistic on the year ahead he is more cautious than he was 12 months earlier: “Valuations and yields are lower than they were at the start of 2024, meaning the rewards are lower as a result. 2023 and 2024 were a case of finding absolute value in markets; 2025 will be about finding relative value – namely how attractive is a bond to something else.”
Davies has positioned BIPS accordingly by upping the credit quality in the portfolio, while also adding to less liquid, long-term holdings and floating rate notes (both of which offer additional value). He has also added some CDS index positions, which act as an insurance policy against spreads widening.
High yield bonds have always been an area where I believe active management excels. Spreads being tight is not unusual and there still remain opportunities for those with the skill to find them. All-in yields remain attractive and strong stockpickers can eke out the extra value on top of that to offer an attractive proposition to investors.
In addition to the likes of the closed-end Invesco Bond Income Plus and Artemis Global High Yield Bond fund, investors may also want to consider the likes of the Man High Yield Opportunities fund, managed by Mike Scott, who has a ‘go anywhere’ approach and looks for mispriced opportunities from across the speculative end of the market – he also has the ability to short in his portfolio.
Another to consider is the Aegon High Yield Bond fund, a style-agnostic portfolio which aims to generate long-term outperformance by exploiting global high yield market inefficiencies which range across issuers, sectors and geographies. Both are top quartile performers over five years and offer attractive yields^^^.
*Source: FE Analytics, discrete calendar performance for IA Global High Yield Bond sector
**Source: Morgan Stanley, High Yield Outlook 2025
***Source: Janus Henderson, 4 December 2024
****Source: Moody’s, 4 March 2025
^Source: Impax Asset Management, 23 January 2025
^^Source: Northern Trust, figures at 30 June 2024
^^^Source: FE Analytics, figures in pounds sterling, figures from 8 March 2020 to 8 March 2025
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
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