AXA IM: Sticking with high yield as core holding may be rewarded over time
Jack Stephenson, US FI Investment Specialist at AXA Investment Managers, discusses the performance and outlook of the US High Yield market, focusing on its stability and potential opportunities in 2025.
On tariffs, we consider the US High Yield market to be quite well insulated, given its domestic focus. US domestic corporates make up around 90% of the broad US High Yield index and some sell-side reports estimate that less than 15% of US High Yield company revenues are generated abroad. This compares to investment grade which has a greater proportion of multi nationals and 27% of non-US companies. That said, indirect impacts could come through supply chain disruption and a decline in business and consumer confidence, particularly given the potential inflationary feed through from tariffs. High Yield sectors most at risk from escalating trade wars include Autos, Retail and Consumer Products.
Outlook US high yield
We continue to believe that spreads, albeit tight relative to historical standards, are justifiably expensive given that the US High Yield bond default rate has continued to decline, reaching 0.3% in January excl. distressed exchanges or 1.4% incl. distressed exchanges9 . Also, due to structural changes in the high yield market such as improving credit quality, the higher percentage of secured bonds, better liquidity, and that the high yield bond market today is at a record short duration, comparing spread levels today to the past 15-20 years is perhaps inherently flawed.
As well as these structural changes, high yield market fundamentals have remained very resilient with balance sheets generally healthy, leverage remaining low, maturities pushed out and interest coverage still at levels above post-Global Financial Crisis averages.
Overall, we believe that the end of the low interest rate era has allowed high yield to its proper role in a balanced portfolio: providing unique diversification qualities and the potential for equity-like returns but with much less volatility. This, we believe, means that sticking with the asset class as a core holding has the potential to be rewarded over time.
