Can US high yield offer respite from the uncertainty?

What’s been happening in the US High Yield market?

After posting 8.2% return in 2024¹ , the US High Yield market has proven to be very stable so far in 2025, despite various headlines with the potential to move markets on both the macro and geopolitical front. Whether it was the AI/Deepsake news that began at the end of January, the tariff announcements or economic data flow and subsequent rate moves, equity markets have been experiencing day-to-day volatility as investors attempt to formulate their view on the direction of markets.

The US High Yield market, meanwhile, has delivered solid positive performance, with spreads initially tightening by around 30bps through January before drifting wider in February to today’s level at 280bps – still tighter than the start of the year² . From a ratings perspective, the lowest-rated CCC segment continues to outperform single-Bs and double-Bs, with continued compression in the highest yielding segment of the market.

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 index³  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.⁴  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.

Technical factors also continue to be supportive for high yield, with sources of demand outstripping supply. On the primary market, new issue volumes are down on a YTD basis versus 2024 – partly due to rates volatility and tariff headlines but also due to some deals being financed in the leveraged loan market, which has seen record gross issuance for each of the first two months of 2025. 

What is the outlook for US high yield?

We expect the Federal Reserve to remain on hold for the rest of 2025, meaning that bond yields should continue to trade in a range around current levels and income will remain the main driver of returns. Importantly, however, the economics of refinancing is much improved for issuers today, with the difference between the average US High Yield market yield at 7.2% and average coupon at 6.4% converging to around 80bps, compared to levels higher than 300bps over the past couple of years⁵ .

This should encourage issuers to continue refinancing and, already, we have seen around 75% of the $40bn of new high yield bond issuance YTD being used for refinancing – a similar level to 2024⁶ . This has left a mere $30bn of high yield bonds maturing in 2025⁷ . Importantly, 60% of the high yield bond market which is set to mature in 2025 is double-B rated, compared to 0% in the loan market⁸ .

As the year goes on, we expect M&A related issuance to pick up, given President Trump’s championing of deregulation and “business friendly” leadership appointments in key regulatory bodies. This typically takes the form of investment grade companies buying high yield companies or larger high yield companies buying smaller high yield companies, which could lead to investment opportunities.

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.

Although bouts of volatility are likely throughout 2025, we believe that the carry in high yield should be enough to compensate investors for short-term uncertainty. Said differently, we believe high yield investors are getting paid to wait until more clarity emerges.

Where are we seeing opportunities in this environment?

Across all our strategies, with plenty of noise on the macro front we are staying disciplined within our fundamental credit selection process, aiming to find value with our analyst team by determining when a bond will likely come out. This might mean identifying a bond that we believe will stay out longer than what the market prices or sometimes determining a better value in a bond that we think will come out earlier than what the market is pricing.

In our opinion, short duration strategies continue to look appealing given the volatile rates environment. At the same time, the US high yield yield curve is still pretty flat despite recent US treasury curve steepening, meaning we have been consistently capturing 85-90% of the overall market yield, for much less duration.

Further up the risk spectrum in higher total return seeking strategies, we are more defensively positioned, given the spread compression in the highest yielding segments of the market. Instead, we are very focused on idiosyncratic opportunities and ensuring that our highest conviction ideas are reflected in terms of position sizing. We would seek to use any potential volatility as a catalyst to add back more risk to the portfolio.

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.