Skip to content
    1. Overview
    2. Alternative Managers
    3. Consultants
    4. Corporations
    5. Family Offices
    6. Financial Advisors
    7. Financial Institutions
    8. Individuals & Families
    9. Insurance Companies
    10. Investment Managers
    11. Nonprofits
    12. Pension Funds
    13. Sovereign Entities
  1. Contact Us
  2. Search
  3. Client Login
Save
Point of View · 07.02.24

Finding Value in High-Value Bonds and Credit Markets

Explore the complexities of the high-yield market through comprehensive insights from our experts.

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

Key Points

What it is

We provide an in-depth analysis of high-yield bonds and credit markets, highlighting their current performance and identifying opportunities.

Why it matters

High-yield bonds and credit markets present potential opportunities for income generation and portfolio diversification in a volatile economic environment.

Where it's going

As economic growth continues, and inflation steadies, high-yield bonds and credit markets are well-positioned for sustained resilience, offering potential value for investors.

Since mid-2023, experts have been increasingly optimistic about U.S. economic growth, which has continued to exceed expectations. Meanwhile, although inflation, as measured by the  , is coming down, it hasn’t fallen enough for the market to feel confident about its future direction. In our view, the combination of strong growth and a stall in inflation improvement suggests the market no longer expects interest rate cuts in the near term.

 

What does this mean for public and private credit markets? In the April edition of the What’s the Market Missing? webinar series, Eric Williams, head of Northern Trust Asset Management (NTAM) Capital Structure Group and lead portfolio manager of our high yield strategies, along with Bob Morgan, managing director of the NTAM Alternative Investments platform, share their insights.

 

 

Identifying Pockets of Value

 

Recent market volatility has been fueled by concern of unchecked inflation and a potential recession, neither of which appear likely at this point.  According to Williams, the volatility creates unique opportunities for high yield investors.

 

“There has been material repricing in the 10-year Treasury both in nominal and real terms. The dollar continues to strengthen, and we’ve seen volatility in the commodities market — all of which leads to questions around credits’ ability to trade at current valuations and remain resilient amidst these potential headwinds.”

 

He added that, historically, spreads have been able to withstand these macroeconomic pressures when economic growth is strong. “And recently,” he said, “spreads have performed quite well because of that growth.” Against this backdrop, we think the market is potentially missing some terrific opportunities in certain segments of the market, including the high yield credit market.”

 

 

A Fundamentally Attractive Backdrop

 

The current credit market environment presents attractive reasons for investors to consider high-yield bonds.

 

  • Low volatility: High-yield spreads have exhibited low volatility year-to-date and have hovered at the tighter end of the spread range vs. higher quality Treasuries over the last couple of years.  This low volatility combined with consistent income generation and discount to par value are characteristics driving more investment in the high-yield market.

  • Increased dispersion: In 2024, we’ve seen a wider range of performance (dispersion) among individual high yield bonds. This at the security level allows investors to add more value by carefully selecting individual bonds rather than just looking at high-level categories like credit ratings or sectors. We’re particularly noticing dispersion in the transportation sector, certain segments of finance, and the energy sector, pointing to potential opportunities.

  • Attractive CCC-rated bond yields: yields remain attractive compared to higher-quality bonds. Looking at spreads since 2021, CCC-rated bonds are near the median level even after their returns outperformed all other rating segments YTD. In contrast, BB and B high-yield bonds seem overvalued relative to higher quality investment grade comparisons. While there's ample opportunities across different bond ratings, careful research and active management are essential to make the most of these investments. 

  • Moderating supply and steady rates: New high yield bond issuance in the first quarter of 2024 was the highest in two years.  We’re not overly concerned that increased supply will be a headwind. A record 83% of high-yield issuance year-to-date has been for refinancing activity.  The amount of new debt coming to the market is relatively sparse and, we believe, can easily be absorbed in this environment where investors are allocating more into high-yield credit markets. 

  • Resilient corporate earnings and guidance: More companies are increasing their forecasts for future earnings, revenue, and other financial metrics and fewer are talking about inflation as a headwind.

  • Low distress levels: Distress levels, which indicate how close companies are to financial trouble or default, remain low. Treasurers and management teams are effectively managing upcoming debt payments and other financial obligations, and most companies, except the least creditworthy, are finding a market for their debt offerings. This suggests a low risk of a rising default rate in the near term.

Private Credit: A Longer-Term Opportunity

 

The private credit market includes a wide array of strategies, positions in the capital structure, and underlying borrower types. It deals in debt securities that are privately traded, making them less liquid than the public high-yield market. 

 

“In this space you can lend to either non-sponsor or sponsor-backed companies, which are effectively owned by a private equity firm,” said Morgan.

 

“Our philosophy is that alpha is created by avoiding losses. We believe private equity sponsorship provides downside support in difficult market environments and protects the senior lenders to help them avoid those losses.”

 

So, what’s the market missing?

 

Morgan notes that some investors may question whether the market can continue to absorb the recent level of capital inflows and still generate attractive yields and risk/return profiles.

 

“We believe it can,” said Morgan. “The market is driven by private equity fundraising and deal flow. A private equity firm buying a business is going to fund the purchase with about 50% equity capital and 50% debt capital. There is a lot of private equity capital sitting on the sidelines.” He added that once markets begin to pick up, firms may need to finance those businesses, which will potentially create a large take-up from private credit providers.

 

Highlighting that valuations in this market differ from the public debt markets, Morgan offered, “In a relatively illiquid asset class like private credit, there isn't a daily buyer and seller of assets. Valuations and private credit are dictated by company performance and moving interest rates. At the end of the day, you're looking for repayment of capital and avoiding losses on those credits.”

 

Morgan points to two key considerations for a potential private credit investor. The first is the risk of loss of capital and loss of investment liquidity. The other is a level of experience and expertise. It’s important to understand the experience, tenure, and results of the manager you choose and whether they can create a strong portfolio for you. Given the strong inflow of capital into the private credit markets and the rising number of firms raising capital, it has become more important to perform due diligence on their ability to work out of poor credits. Many of today’s firms did not exist during the last severe credit cycle in 2008-2009.

 

 

Conclusion

 

High-yield bonds and private credit present compelling opportunities in today’s credit markets. Deciding whether these investments are requires you to understand your risk tolerance, the potential impact of current market volatility, and the economic backdrop. Choosing a credit manager that has been tested in many market cycles can help you successfully navigate the dynamic landscape of high-yield bonds and private credit.

Main Point

A Close Look at High-Yield Bonds and Credit Market Dynamics

Stay informed with our expert analysis of high-yield-bonds and credit markets. Discover how ongoing economic trends shape investment opportunities, understand key factors affecting performance, and prepare for future market shifts with our comprehensive insights.

Investment Perspective

Resilient Consumers Support Growth

  • View Now
Multi color painting

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.

 

Hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of (NTI) or its affiliates.

 

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