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.

Finding Value in High-Yield Bonds and Credit Markets

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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.

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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.

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