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MarketScape · 08.19.24

High-Yield Bonds: Exploring Opportunities in a Volatile Market

We explore how strong fundamentals and a resilient economy may position high-yield bonds as a potentially compelling choice in today’s fluctuating market.

  • Portfolio Construction
  • Fixed Income Insights
  • Risk Management
  • High Yield Strategy

Key Points

What it is

We analyze tactical asset allocations, focusing on equities and credit within an economically resilient and evolving policy environment.

Why it matters

With central banks possibly preparing to lower rates, it may set the stage for a potentially supportive backdrop for equities and credit.

Where it's going

Market trends suggest a shift toward neutral equity stances and a reevaluation of fixed income as supportive monetary policies are anticipated.

Throughout the first half of 2024, investors were allocating to high-yield bonds with goal of achieving attractive returns combined with important diversification benefits. These returns were driven by expectations of a mixture of high carry and a more modest spread compression potential. However, recent market volatility has led to sharp repricing of high-yield bonds, improving valuations that may yield equity-like returns with significantly reduced volatility. Let’s take a closer look.

 

High-yield bonds in the current market environment are well-suited for risk allocation, as their potential for higher returns can help offset many of the risks present to investors. While market uncertainty is expected to continue due to geopolitical concerns and the upcoming U.S. election, corporate fundamentals remain strong, and the macroeconomic backdrop remains favorable. We view concerns around the credit and to be unfounded given the fundamental strength of corporate balance sheets and the strength of the capital markets, which help to alleviate funding pressures.

 

We remain confident in maintaining a pro-risk stance, as the fundamental outlook remains solid. Despite recent volatility, we see no need for significant adjustments and recommend staying the course. High-yield bonds are well-positioned, with the diversifying effects of interest rates adding further support. Whether compared to the S&P 500 or relative to a traditional , high yield has consistently delivered higher risk-adjusted returns over the past two decades.

 

Our risk framework suggests maintaining risk positions within dedicated fixed-income and multi-asset portfolios, with high yield bonds remaining a key component. While recent market developments haven’t materially changed the fundamental picture, we are monitoring sources of potential risks. Economic growth does appear to be moderating in line with monetary policy goals, and most corporate profit outlooks are ahead of expectations. As a result, we have no change in view about the trajectory of these macroeconomic drivers and their impact on the fair value of high yield spreads. In our view, the recent spike in volatility presents an opportunity for investors to consider the potentially attractive risk-adjusted returns of .

Main Point

Navigating High-Yield Bonds in a Volatile Market

Recent market shifts have enhanced the potential appeal of high-yield bonds. With solid corporate fundamentals, these bonds present a potentially attractive option for those looking to balance risk and returns in an uncertain market.

Related Content

Finding Value in High-Yield Bonds and Credit Markets

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Skydiver falling between mountain range

Eric Williams

Head of Capital Structure

Eric Williams is head of capital structure and a senior portfolio manager on the global fixed income team at Northern Trust Asset Management. He has broad oversight of our actively managed leveraged credit platform and is the lead portfolio manager on several leveraged credit strategies across the firm.

Read Bio

Contact Us

Interested in learning more about our expertise and how we can help? 

IMPORTANT INFORMATION

Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

 

Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.

 

For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This document may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.

 

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

 

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.

 

Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.

 

Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

 

Not FDIC insured | May lose value | No bank guarantee