High yield bonds are an important and liquid market for companies below investment grade rating to find financing. At Northern Trust, we classify high yield as the least risky risk asset. This is because they historically have delivered equity like returns, without the equity like volatility over the full market cycle, thanks in part to its income component. The asset class also provides important diversification benefits and is often a cushion for investors’ portfolios when the stock market falls.  

While economic uncertainty could spark market volatility, we think the high yield market offers a compelling opportunity in the current environment. The high yield market has undergone significant changes. Compared to a decade ago, the quality of the high yield market has improved, with a greater proportion of higher rated issuers and fewer, lower rated issuers. The ability for companies to cover interest with earnings is strong, and debt accumulation by companies is restrained, potentially helping to avoid defaults or mitigate losses if default does occur. The markets are welcoming for issuers looking to term out their debt, and there is little near-term need for refinancing by the more vulnerable issuers.

Income is an important component of high yield returns, and the yield for the high yield market is broadly seven three quarters percent, which historically has been correlated to periods of high distress, but importantly representative of strong prospective total returns.<sup>*


*</sup>Past performance in not indicative of future results.