High Yield Bonds Analysis

Considerations for the High Yield Bond Market: The BB-rated High Yield (HY) bond market has shown strong performance, with favorable news recently related to growth and inflation.  Fundamentally, the companies represented in the HY Index have a favorable upgrade-to-downgrade ratio. BB-rated bonds constitute 50% of the HY market, distinguishing them from lower-rated B and CCC companies. BB HY bonds typically feature fixed rate, comparatively lower coupons, resulting in lower liability costs and more manageable debt service. In Contrast, the CCC-rated segment shows a concerning trend, with an upgrade-to-downgrade ratio below 0.5 (2x as many downgrades). The credit quality dispersion, shown in the chart below, reveals that BB vs. CCC-rated bonds trade at a spread margin of ~400 to ~1,200 bps, currently sitting inside of 750 bps.  While CCC credits can generate substantial returns during robust economic growth in a low default rate environment, and have rallied with the market in recent days, CCC deterioration is most pronounced during distress and recession. During the first half of 2020, the BB-CCC spread differential reached 1,200 bps, and in 2016, CCC spreads were even wider. It is noteworthy that Europe is straddling recession, and the BB-CCC European HY bond spreads have recently widened to 1,400 bps, surpassing its peak in 2020. So despite, the recent rally in lower-rated HY bonds, caution is warranted for the weakest segment of corporate credit. The HY bonds historical default rate: BB’s 0.4% default rate, B’s 1.4% default, and CCC’s a stunning 14.3% historical default rate! During a recession, default rates tend to increase significantly from historical measures. Composition of HY Index: 50% BB, 39% B, 11% CCC. 1 year ago, the HY Bond Index had 1.2% default rate. Today, the trailing 12M default for the HY bond market is 2.6%. By Q2 2024, I expect the default rate for high yield bonds exceed 4%. Michael Schlembach, Marathon Asset Management’s PM for High Yield, expects default rates to increase in 2024, with peak default rates potentially reaching ~1.0%, ~3.0%, and >20%+ for BB, B, and CCC’s, respectively. The key will be to invest in the debt of companies with solid fundamentals and financial strength to navigate the pending downturn. If you believe as I do that an economic slowdown (potential recession) is likely in 2024, it might be best to focus on higher quality credits with robust operating businesses within the HY market. Ford serves as a prime example in the BB sector, having recently been upgraded to Investment Grade by S&P, marking it as the largest 'rising star'. Ford represents 2% of the HY index with $41 billion of bonds, its upgrade has spurred demand for other quality BB-rated bonds to replace it. While recent inflows have tightened BB spreads, I advise against trading based solely on the technicals, as this post is intended purely for informational purposes. U.S. HY rated BB vs. CCC Differential:

As someone who grew up in the leveraged finance markets, I can say with confidence that today's high yield market is not the one we all once knew. My team and I have spent considerable time analyzing the evolution of global credit markets and what it means for asset allocation, portfolio construction, and risk management. And with all the twists and turns of the past decade, one of the quietest transformations has been hiding in plain sight: high yield. That is why I wanted to share my recent Financial Times op-ed on why we believe the high yield market is positioned for its second act. ➤ The asset class has fundamentally changed. With a record 57% of US high yield and 68% of European high yield rated BB, lower software exposure relative to loans and direct lending, shorter duration than at almost any point in the past 15 years, and first lien secured bonds at an all-time high of 33% of the US market, this is not your grandfather's junk bond market. ➤ And the technical backdrop is shifting in its favor. As CLO appetite has grown more selective and direct lending terms have tightened, more issuers are rediscovering what high yield has always offered: a deep, diversified, and durable investor base that prices risk when others step back. It did it through the GFC. It did it through COVID and it is doing it again now. ➤ For investors, despite tight spreads, the all-in yield remains compelling in absolute terms and increasingly attractive on a risk-adjusted basis relative to alternatives carrying more risk for only modestly more yield. The junk bond label was earned forty years ago and the market has spent the last decade writing its new chapter. I hope you will give the op-ed a read, and for a more global deep-dive on how KKR is thinking about the opportunity set, my colleagues Jeremiah Lane, Eddie O'Neill, and I recently published “High Yield’s Second: What AI Revealed about Credit Quality" 📎Read it here: https://go.kkr.com/4w7bXWK

India's high-yield dollar bond market may be stirring back to life. After a slow period marked by Middle East tensions, higher oil prices and elevated hedging costs, a growing pipeline of Indian issuers is preparing to tap international debt markets. A few developments are helping reopen the window: ✅ Hedging costs have fallen sharply from May & April highs ✅ The rupee has strengthened from recent lows after RBI measures ✅ Global investors are searching for yield amid a shortage of Asian high-yield supply The result: a queue of prospective issuers, including debut borrowers (Capri Global) and repeat names, is forming behind recent transactions from IIFL Finance (two deals in a month) and Vedanta Resources. What's particularly interesting is that India is increasingly becoming one of the few places in Asia still offering investors meaningful high-yield spread opportunities. Short-duration structures, refinancing stories and improving credit profiles are drawing attention from global funds. But supply alone won't guarantee success. Investors remain selective, especially for debut issuers and more leveraged credits. New issue concessions and strong execution will continue to matter as the pipeline builds. With Indian high-yield issuance already nearing last year's full-year total, the second half of 2026 could be one of the busiest periods for offshore fundraising in recent years. My latest IFR story examines what's driving the resurgence and which issuers are lining up to come to market. https://lnkd.in/dqa6XiNg #India #Bonds #FixedIncome #CreditMarkets #HighYield #DebtCapitalMarkets #EMDebt #BondMarket #Investing #IFRAsia #CapriGlobal #IIFLFinance #ShapoorjiPallonji #ContinuumGreenEnergy

August 2024 - US Corporate Bond Recap US INVESTMENT GRADE CORPORATE BONDS: In August, US Investment Grade (IG) corporate bond spreads remained stable at 93 basis points (bp), unchanged from the end of July. However, this stability belies significant volatility earlier in the month when spreads widened to 110bp due to yen carry unwind trades disrupting the market. This spike brought spreads closer to their 5-year average of 119bp, albeit briefly. The 5-year low for US IG corporate spreads is 80bp. As of August 30, 2024, the yield on US IG bonds stood at 4.94%, with a duration of 7.1 years. US HIGH YIELD CORPORATE BONDS: US High Yield (HY) corporate bond spreads tightened to 305bp by the end of August, down from 314bp at the start of the month. Notably, spreads had widened to an impressive 381bp on August 5th, presenting a significant alpha opportunity for those with the conviction to invest in US HY corporate bonds at that time. The 5-year average spread for US HY corporates is 402bp, with a 5-year low of 262bp. The yield on US HY bonds was 7.30% as of August 30, 2024, with a duration of 2.9 years. OVERALL PERFORMANCE: August proved to be a favorable month for both US Investment Grade and High Yield Corporate Bonds, with returns of +1.57% and +1.63%, respectively. These returns were largely driven by movements in interest rates. During the month, the 2-year US Treasury yield fell significantly by 34bp, from 4.26% to 3.92%, while the 10-year US Treasury yield declined by 13bp, from 4.03% to 3.90%. This flattening of the yield curve brought the UST 2s10s curve close to positive territory for the first time since July 2022, indicating that inflation appears to be under control and recession fears are diminishing. Front-end rates are decreasing as the Federal Reserve is expected to cut rates. The CME Fed Watch Tool, which uses futures pricing to gauge market expectations for interest rate changes, indicates a 30% chance of a 50bp rate cut and a 70% chance of a 25bp rate cut at the upcoming FOMC meeting on September 18th. YEAR-TO-DATE PERFORMANCE: Fixed income returns continue to lag behind the rallying equity markets. Year-to-date, US Investment Grade Corporate Bonds have returned +3.49%, and US High Yield Corporate Bonds have returned +6.29%. According to LSTA Morningstar, US Leveraged Loans have returned +5.84%. Cash, represented by 1-3 month US T-Bills, has returned +3.64% YTD. In contrast, equities have significantly outperformed fixed income and cash, with the S&P 500 up +18.4% and the NASDAQ up +18.0% YTD.

 🚩A Crucial Market Is Sending Its First Warning Signal The Fed’s rate-hiking campaign could still weigh heavily on the economy, not least by making it harder for companies to access funding. But on the surface, investors seem confident that most US companies will generally be able to handle a slowdown without shutting down. That’s clear in the fact that the high-yield spread — that’s the extra yield that investors demand for buying riskier corporate bonds over safer government bonds — is still quite narrow. This indicates that investors aren’t too concerned about a spike in company failures, which would wipe out the interest from the riskier bond’s payments. But as always, the devil is in the details. Look deeper within the high-yield sector, and you’ll see investors are now asking for much higher rewards for holding the riskiest “junk bonds” – specifically those rated CCC (light blue line in the chart) – compared to the slightly less risky B-rated junk bonds (dark blue). Of course, it’s hardly surprising that CCC bonds boast higher yields than single B’s. They’re marginally riskier, after all. But historically, that difference has been slight. And over the past few months, the gap has been widening significantly. That suggests that investors are increasingly wary of defaults within the most speculative pockets. Now, that could be due to sector-specific concerns – CCC bonds are more common in media, consumer products, and high technology – or concerns that a tougher economic environment could wipe out companies with a weak spot financially. That's a worrying trend. As you can see in the chart, the last time we saw such a gap was right before the dot-com bubble burst. Investors poured money into highly speculative ventures during the tech boom, many of which carried CCC ratings. And as the sustainability of those businesses came into question, investors demanded much higher returns to offset the heightened risks. That led to a sharp spike in the yield spreads of CCC-rated bonds over B-rated bonds, a clear signal that investors saw potential for severe financial distress in those companies. That warning sign started flashing about a year before the bubble burst. A similar pattern unfolding today suggests that not everything is stable beneath the surface. The rise in CCC-rated yields indicates that the chance of defaults for the most speculative companies are rising, and is higher than the high-yield spread suggests. The risk from here is that the economy slows down more aggressively or borrowing costs stay high for longer than hoped, then these fears of defaults could spread to other companies – as it did before the dot-com bubble popped. More worryingly, that could bring trouble for private credit lenders, which loan to similarly smaller, debt-laden private companies. And since private markets may represent an important threat to our financial system, this is a risk worth watching. > Finimize

Year to date, the lowest rated corporate bonds and loans have rallied the most amongst all corporate debt types, as economic data has sustainably outperformed asset market expectations. This has set up an interesting situation where as the economy continues to get later into its typical cycle, the riskiest debt (which should, in theory, get hurt the most from a recession) has now nearly completely priced out that potential outcome. Should a recession ultimately manifest, which historical data strongly implies it will (all cycles must end in a recession), high yield bonds and leveraged loans appear quite vulnerable to a meaningful downturn. For some, this could cause a meaningful overconcentration of risk, especially for portfolios that are equity risk dominant.

“But why don’t you recommend these high-return bonds? They’re still bonds — and safer than equity, right?” This is a question we often get from clients. And each time, we explain — not all bonds are safe. We’ve always been cautious about such products, no matter how attractive the yield sounds. If you want to invest, first know the underlying risk. But often, we’re questioned back — “Aren’t bonds supposed to be safer? Then why not go for higher returns?” And here’s exactly why 👇 Take the recent TruCap Finance case. Thousands of investors poured in crores into their bonds, tempted by 13% returns, and confident it was “safe debt.” But on 16th July 2025, TruCap defaulted : both on interest and principal. Now, those same investors are facing capital erosion and no clear resolution in sight. This isn’t about hindsight. Also, the bigger issue : lack of liquidity. Even if you sensed trouble, you couldn’t exit. What this teaches us (again): -High yield = High risk -Credit risk is real -Liquidity risk is often ignored but is most damaging If you’re chasing high yields, do it through mutual funds — where there’s diversification, professional management, and at least some liquidity. Because in debt, the biggest risk isn’t volatility — it’s being stuck. #TruCapDefault #BondRisk #FixedIncome #ClientEducation #InvestmentAdvice #CreditRisk #HighYieldBonds #InvestorAwareness #PurvaInvestments #FinancialPlanning #DebtFunds #MFDViewpoint #RealTalk

A single metric rarely tells the whole story. Investors are rightly paying attention to tight credit spreads across global high yield markets. But many are overly focused on “what” rather than “why.” In this piece, Michael Connelly and Anton Dombrovskiy examine several factors that, when taken together, help explain spread compression and strengthen the case for high yield exposure. Some key takeaways: ● All-in yields remain attractive, both on an absolute basis and relative to the S&P 500’s earnings yield. ● Credit quality has improved considerably, and default rates are still below historical averages. ● Liquidity in high yield markets is structurally better than it used to be. Read more from Michael and Anton on the evolution of high yield debt and its role in diversified portfolios.

Chinese HY Bonds Show Signs of Recovery The trajectory of China's housing market is beginning to inspire optimism. It's quite the turnaround—nobody would have predicted a year ago that this once-shunned segment of Chinese high-yield USD bonds would rally to match the performance of global benchmarks. A key indicator for this group has consistently risen almost every week since last November, signaling a move away from previous lows. In the last two weeks, the narrative has been exceptionally positive, especially as more major Chinese cities ease housing restrictions. Approximately 90% of the offshore junk bonds indexed have posted gains this month, with some notable spikes in value this week. Since August, the index has climbed 13%, reducing the collective yield of these bonds to below 11.5%, a low not seen in nearly three years. It's worth noting, however, that this improvement is partly due to the removal of some of the more troubled bonds from the index. While the resurgence of China's housing market is likely to be a protracted process—with sector-wide monthly sales still in decline and new home prices continuing to drop—the restructuring efforts typically span years. Nonetheless, current indicators are decidedly more upbeat

US High Yield corporate bond spreads over Treasuries always increase before a recession starts. Such was the case in 2000, 2007, and even early 2020. Here's where they stand now: High yields spreads are currently 3.21 percentage points. They are up marginally from their YTD lows of 3.03, but still below their year end 2023 levels of 3.39 points. Since the end of the 2020 Pandemic Crisis, HY spreads have been as high as 5.9 points (July 2022) and as low as 3.0 points (December 2021). We are much closer to the low end of the band than the highs. HY spreads today are essentially the same as the lows from 2015 - 2019 (3.2 points), when confidence in the US economy was generally strong. Why this matters: High yield investors are a cautious lot because the best they can do is receive timely payment of interest and principal. If they are pricing HY bonds aggressively, it is because they expect continued economic growth. Bottom line: US large cap stocks are not alone in their belief that the US economy will avoid recession over the next 1-2 years.