High yield bonds have fared well amidst broad, risk-on market appetite. Yet even with lending standards set to remain significantly tighter for longer, the outlook for the asset class still looks favourable, says Justin Jewell.
Markets were in a tricky place last year, but an economy that has essentially found its feet amidst falling inflationary pressures has given investors more confidence to say they’ve seen the worst of the policy challenges.
Meanwhile, headwinds such as a deterioration in credit quality or weakness in the economy, along with potential tailwinds like multiple Federal Reserve interest rate cuts, would broadly balance out and are unlikely to move the dial meaningfully one way or the other.
Investors are back in a world that is about accumulating income from high yielding assets. As a result of last year’s much higher starting yields for high yield bonds, the asset class now offers attractive compensation for the risk of spread or rate shocks over the medium term. Investors can realistically expect yields of 7-9% compared to two or three years ago.