High yield bonds continue to attract investor interest despite tight spreads over government bonds, with starting yields, shorter duration and downside protection continuing to support the asset class, according to portfolio managers at global investment advisers Payden & Rygel.
Speaking during a media briefing, Jordan Lopez, managing director and head of the high-yield strategy group, and Frasat Shah, senior vice president for global fixed income, said investors are now focusing on overall yields rather than spreads alone.
High yield remains attractive because all-in yields are still above 7%, adding that starting yields have historically been the strongest predictor of future returns. While spreads are relatively tight by historical standards, investors could still achieve high single-digit returns if starting yields remain attractive and active management adds alpha.
The managers also contrasted high yield with long-dated government bonds, arguing that the asset class’s shorter duration has helped reduce interest-rate volatility. The average duration of the high yield market is around three years, making it less sensitive to rate movements than long-dated sovereign debt.
High yield has historically performed well during periods of rising rates because spread compression has often offset part of the increase in government bond yields, while coupon income has remained the primary driver of returns.
The discussion also turned to private credit, where the managers struck a more cautious tone. Public high yield currently offers a more attractive risk-reward profile, pointing to concerns over private credit’s concentration in technology and software companies, where AI could compress margins or render some business models obsolete.
Unlike public markets, private credit assets are less liquid and are not marked to market as frequently, they said, adding that this has fuelled concerns among some investors about underlying valuations and recoveries if defaults increase.
Within high yield, the managers said they currently see the greatest value in single-B rated issuers, while remaining selective on a company-by-company basis rather than targeting specific ratings. Exposure to triple-C debt has been reduced following a strong rally that compressed spreads relative to higher-quality credits, while software remains an area of caution.
Looking ahead, default rates in the high yield bond market remain below historical averages and are expected to rise only modestly. However, they said the leveraged loan market faces greater risks because of its higher exposure to technology borrowers, refinancing pressures and the potential impact of AI on software businesses.
