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Despite ongoing geopolitical risks and intermittent tariff rhetoric from Trump, the high-yield market has demonstrated notable stability. Strong underlying fundamentals, low default rates, and historically short duration continue to create an attractive environment for investors.
US President Donald Trump's sporadic tariff policies have periodically unsettled global markets. However, it has become clear by now that their lasting impact has been limited: Global trade and capital flows are not easily disrupted, and should Trump pursue a more aggressive course, the domestic political repercussions could prove significant.
Against this backdrop, the high-yield market has stabilised following a brief phase of volatility. Strong fundamentals support this recovery: Net leverage in the segment remains steady, averaging around four times EBITDA (earnings before interest, taxes, depreciation, and amortisation). While some issuers have adopted a more cautious outlook amid prevailing uncertainties, balance sheets remain robust, reflected in tight credit spreads. Overall, spreads are trading near their long-term averages, suggesting neither an over- nor undervaluation.
The segment’s duration remains historically low. Whereas post-financial crisis durations of 4 to 4.5 years were typical, the current average sits closer to 3 years. The duration should be viewed in conjunction with spreads, as it is well known that the longer money is lent, the higher the risk premiums. Overall, we therefore consider credit spreads to be fairly valued, taking into account the low duration of the market.
The technical environment also remains constructive. Net issuance is slightly negative, with limited new supply and ongoing inflows driving demand. This supply-demand imbalance continues to support the asset class.
High-yield bonds continue to offer an appealing yield to maturity, currently around 7% p.a. in US dollars. While euro-based investors must factor in current hedging costs of roughly 2.4%, the asset class remains attractive, with a slight overweight in euro allocations appearing justified.
At the ratings level, B-rated bonds currently trade at a more attractive relative valuation than BB-rated peers. This may be due to default rates remaining below the historical average – currently just under 4% and trending lower. The distressed ratio (the proportion of bonds trading at spreads above 1,000 basis points) has also declined.
In the absence of unexpected market shocks – always a possibility – we expect default rates to remain broadly stable. To a certain extent, these risks are priced into the respective issues, meaning that high-yield bonds present a compelling investment opportunity heading into the second half of the year.
