Systematic Insights: Is High Yield Doing Better Than You Expected?

Is now the time to consider US high yield and re-evaluate your view of the market’s risk profile?

High yield spreads widened by 60bp year-to-date, trading around their highest levels since September, pushing all-in yields up to 7.6%¹.

But you may be unaware that year-to-date total returns are in positive territory. The performance of high yield credit has been more in line with US Treasuries and investment grade credit than equities, but with lower volatility than either (Figure 1). 
 

Figure 1: High yield and fallen angels have performed more like investment grade corporates than equities so far in 2025²

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You read that right – high yield and fallen angels have been two of the least volatile asset classes so far this year.

One major factor has been the impact of coupon income (Figure 2). Another consideration surrounds fallen angels and high yield potentially having an inbuilt volatility buffer. Their performance is the sum of two components, “rate” returns (i.e Treasury returns of equivalent interest rate risk) and “spread” returns (i.e. “excess returns” versus those Treasuries).

Historically, rate and spread returns have been negatively correlated, at -0.40 for fallen angels and -0.35 for high yield, both notably higher than the -0.26 for investment grade³. In “risk-off” markets, flight-to-quality moves have tended to support the rate component, while the spread component has tended to outperform through “risk on” environments.

Overall year-to-date, coupon income and the rate rally have offset the drag from spread widening (Figure 2). 
 

Figure 2: Rate returns and coupon income have helped keep high yield returns stable and above water so far in 2025⁴

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This may be a surprise. Many remember high yield selling off in line with equities through past major down markets (like 2008). However we argue that the market has structurally changed, making historical comparisons less meaningful.

There were potential signs during the pandemic, when high yield drawdowns were closer to investment grade. In 2022 – an unusual year in which both “risk” and “risk-free” assets sold off – high yield even outperformed both equities and investment grade (Figure 3). 
 

Figure 3: Through more recent market sell-offs, high yield has performed more like bonds than equities⁵

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Key factors to consider include a secularly rising share of higher-rated BB debt in high yield indices (at ~51% today versus a mean of 43% since 2000⁶). In recent years, we have also observed leveraged issuers increasingly turn to private credit instead of high yield and leveraged loans. These include private equity players financing leveraged buy-outs and distressed issuers refinancing into structured vehicles.  

In our view, this sell-off may be a buying opportunity to lock-in yields in high yield and fallen angels, and it may be time to re-think risk and valuation metrics for these markets.

1 Bloomberg, Insight, March 26, 2025. Bloomberg US Corporate High Yield Index.Past performance is not indicative of future results. Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations. 
2 Bloomberg, Insight, March 26, 2025. (Indices: Bloomberg US Treasury Index, Bloomberg US Corporate Bond Index, Bloomberg US High Yield Fallen Angel 3% Cap Index, Bloomberg US Corporate High Yield Index, S&P 500 Index, Bloomberg Magnificent 7).Past performance is not indicative of future results. Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations. 
3 Bloomberg, Insight, January 2005 to March 26, 2025, based on monthly returns. 2005 is the inception of the Bloomberg US High Yield Fallen Angel 3% Cap Index.  
4 Bloomberg, Insight, March 21, 2025. (Indices: Bloomberg US Treasury Index, Bloomberg US Corporate Bond Index, Bloomberg US High Yield Fallen Angel 3% Cap Index, Bloomberg US Corporate High Yield Index, S&P 500 Index, Bloomberg Magnificent 7). Total return may not always sum due to rounding. Past performance is not indicative of future results. Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations. 
5 Bloomberg, Insight, March 26, 2025. (Indices: Bloomberg US Treasury Index, Bloomberg US Corporate Bond Index, Bloomberg US High Yield Fallen Angel 3% Cap Index 
6 Bloomberg, Insight, March 26, 2025