17 Jul 2026
The label "junk bonds" has been around long enough to subtly influence how many investors think about the high yield market - as something inherently reckless, a place you go when you are willing to gamble. After 26 years in credit markets, 13 of them focused specifically on high yield, I find that characterisation increasingly misleading, and substantially wrong.
The reality is that high yield, when approached with discipline and genuine selectivity, can offer a differentiated profile in the current environment. Within high yield, income has historically been the largest driver of total returns over the long term. In addition, in certain market environments, the spread cushion can allow for a great element of inflation protection through generally positive real yields.
As an asset class, long-term historical returns for high yield bonds have, in certain periods, been comparable to equity markets, often with lower observed volatility, although return outcomes can vary across market cycles and differ over various investment horizons.
High yield bonds also have a structural advantage that is often overlooked - the asset class is less susceptible to value traps commonly associated with equities. Unlike equities, most high yield bonds can avoid the value trap pitfall as they have legally binding maturity dates, fixed payment schedules, and other contractual obligations. In the equity market, a cheap stock could stay at low levels
indefinitely and effectively trap investor’s capital, waiting for a mean reversion that may never come. High yield bonds can clearly have depressed prices at times, but if the issuer does not default, price dislocations may be resolved over time as the bond approaches maturity and the price pulls to par.
While equities and high yield corporate bonds are inherently different security types and there are many aspects for investors to consider, the concept of a value trap may manifest differently in the high yield bond market, particularly given the contractual features of the asset class. The value embedded within an optically cheap bond typically can be unlocked by careful credit analysis allied to the passage of time as the bond may converge toward par as maturity approaches, subject to issuer performance and market conditions. In addition to selecting bonds with attractive risk-return profiles, it is equally important to have the discipline to avoid the losers.
In the current market, credit spreads across high yield are not where I would want them to be. Generally speaking, the compensation investors are receiving for default risk, adjusted for fundamentals and excess spread, looks expensive on most metrics - and that was true even before the current geopolitical uncertainty added new layers of risk to the outlook.
Why haven't spreads widened more? The answer appears to be driven in part by technical factors. For an extended period, demand for high yield paper has exceeded supply, and that imbalance has suppressed spread peaks even when the macro picture has deteriorated. Many investors continue to have excess cash to put to work, and the demand for high yield bonds has continued to outpace supply. This has put positive pressure on the market and has been one of the reasons spreads have remained tight.
The market has also developed a somewhat Pavlovian tendency of buying dips aggressively, having been previously rewarded for doing so through multiple cycles. That reflex works until it does not, and I think investors may be underestimating the risk that the current situation proves more persistent than the quick, clean resolutions markets have grown accustomed to.
When spreads are not compensating you adequately for the perceived risk, the response for many long-term investors isn’t to simply exit the market. Although the high yield bond market overall looks expensive from a spread perspective, there are still opportunities to be uncovered below the surface. Additionally, valuations can be assessed from various dimensions, and we believe that the asset class currently looks attractive on a yield basis. In our view, high yield can still offer compelling starting yields, which tend to be a better indicator of future return potential, regardless of spread levels. In addition, the income argument remains powerful, and income has historically been the largest driver of total returns in high yield. In this environment, we believe that income can be used as a buffer to construct portfolios that can generate more carry than the index to bolster the total return potential. An emphasis on high income can also help maintain a high break even, expressed as yield divided by duration, that can provide room to absorb spread widening before entering negative total return territory.
This positioning strategy is important, as not all high yield bond portfolios are created equal. A portfolio with a high average coupon and short duration is a fundamentally different proposition from a long-duration, lower-quality portfolio, even if both sit under the broad "high yield" label.
The quality and duration levers matter enormously here. If you are genuinely bearish on spreads and want to be maximally defensive, a short-duration, high-quality portfolio of BB-rated credits may offer a more defensive profile – but you will give up significant carry versus benchmarks and peers while you wait for wider spreads, and that wait can be very long indeed. Our view is that investors can take a measured degree of lower-rated credit risk while staying short on duration, with the goal of generating returns driven by high carry while waiting for higher spreads.
One of the advantages of running a truly global high yield mandate is the flexibility to find value where it actually exists, rather than letting the index composition dictate investors’ holdings.
Approximately 60% of the global high yield market is in the US, and most index-oriented investors in the asset class are therefore heavily exposed to US high yield at all times. This might be an optimal place to be allocated if the circumstances are right, but equally it might not, and it is important to have that flexibility to invest where the value is. Currently we view the US high yield segment as relatively unattractive when compared to other regions within the Global High Yield market, such as Europe and emerging markets. This is not because the US macro picture unattractive, but rather, we believe that the tight US spreads do not reflect adequate compensation relative to the fundamentals and leverage for many of these companies.
Instead, we believe there are more compelling opportunities in European high yield, Nordic bonds and hard currency emerging market debt. We also think there are opportunities in Sterling high yield – a market that has historically traded cheap relative to peers for the best part of a decade and currently offers an attractive return potential for investors willing to do the bottom-up work.
Two structural shifts that will have an impact on high yield markets deserve serious attention from investors. The first is private credit. Its growth has been extraordinary, but it has not yet been through a full credit cycle. Rapid growth in any asset class often leads to loose underwriting standards and the result of these lending practices may not become fully apparent until conditions tighten - and when they do, the transmission mechanisms between private and public credit markets will likely become clear. Investors who cannot exit private credit positions may seek liquidity elsewhere, and public high yield could be where investors go to sell more liquid bonds. We are watching this carefully.
The second is AI disruption. We have seen certain sectors sell off sharply when a new AI application threatens an established business model, sometimes with only a tenuous connection to the underlying fundamentals. That creates both risk and opportunity - but the asymmetry of getting it wrong in bond markets means caution is warranted. Preserving capital remains a top priority, and prudent bond selection is essential.
High yield remains a compelling asset class, and we believe that high yield bonds currently offers investors the potential for attractive yields, high income and solid long-term total returns*. However, it rewards rigour, not complacency.
*Financial market trends are based on current market conditions which will fluctuate. All investments contain risk and may lose value.