The start of 2024 has unfurled a rather promising chapter for global high-yield bonds. While the allure of hefty initial yields continues to draw the investor’s gaze, the relatively narrow spreads hint at an underestimation of the lurking credit risks.
According to the latest Morningstar Global High Yield Bond index, this segment enjoyed a robust return of 3.3% in the first quarter alone. Outperforming this metric, the average fund within Morningstar’s global high-yield category pushed even higher to 3.6%. This performance is notably strong, considering the annual average returns of these funds hovered around 3.8% and 5.4% over the last five and ten years, respectively.
March saw a surge in new issues, the likes of which hadn’t been witnessed since October 2021. With spreads tightening significantly over the past six months, issuers have been eager to leverage this trend for their refinancing strategies. This flood of offerings found a receptive market, as evidenced by the substantial inflows into both EUR High Yield and Global High Yield categories, totaling EUR 4.9 billion and EUR 1.9 billion respectively over the past six months.
High yield bond spreads coming down
Caution
However, a note of caution hangs in the air. Some market participants express concerns that the high-yield bond market might be growing overly complacent about potential headwinds, such as rising funding costs and looming economic downturns. Although April saw a minor uptick in spreads, reflecting dwindling hopes for immediate U.S. rate cuts, the overall market sentiment remains buoyant.
The landscape for the riskier slices of the high-yield market, especially those rated CCC or lower, has also seen some shifts. Since mid-March, spreads in this segment have widened by approximately 80 basis points in the U.S., a stark contrast to the modest 20-point increase observed among the relatively safer BB-rated bonds.
BGF Global High Yield Bond fund
Amidst this complex backdrop, the BGF Global High Yield Bond fund emerges as a standout. Praised by Morningstar for its strong management and robust investment strategy, the fund has not only consistently ranked in the top quartile of its category over the past decade but also begun 2024 on a high note. The fund’s strategic flexibility was particularly evident during the equity and high-yield bond market volatilities of 2017 and 2021. This approach, albeit not flawless during the 2020 market turmoil, underscores the fund’s capacity to navigate diverse market conditions effectively.
The management team, led by Mitchell Garfin and David Delbos, brings a wealth of experience to the table. Along with their European counterparts, José Aguilar and James Turner, this team leverages a vast network of insights from BlackRock’s global divisions. Despite managing a colossal $55 billion in global high-yield assets, which occasionally hampers agility, the fund strategically invests in larger, more liquid issues to maintain a competitive edge.
Moreover, a comprehensive risk committee meticulously oversees the portfolio, ensuring that the exposure to various market sectors and overall risk remains within intended boundaries. This layered investment strategy, combined with the seasoned oversight of its managers, positions the BGF Global High Yield Bond fund as a prudent choice for investors navigating the high-yield terrain in these intriguing times.
Thomas De Fauw is a manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds on the basis of quantitative and qualitative research. Morningstar, one of Investment Officer’s knowledge partners, each Friday highlights the performance of a specific fund in a specific sector in the Morningstar Fund Radar article.