Key Insights
- Volatility has pushed high yield bond spreads to extreme levels, but we believe the asset class’s fundamentals are stronger than valuations suggest.
- Recent history has shown that once European high yield spreads have reached more than 600bps, strong returns have typically followed.
- Market prices do not reflect the credit stability enjoyed by many high yield issuers on the back of lower borrowing costs.
Volatility has propelled high yield bond spreads to extreme levels, but we believe the asset class’s fundamentals remain solid, however, and that current valuations do not reflect its underlying strength. This suggests that high yield bonds are cheap by historical standards—and offer a compelling buying opportunity for investors seeking consistent income in the uncertain period ahead.
Anxiety over rising inflation, interest rate hikes, the war in Ukraine, and low growth have sent asset prices tumbling this year, and high yield bonds have been no exception. At the end of June, the effective yield of the ICE BofA Euro High Yield Index had risen to 7.3% from 2.8% at the beginning of the year. Over the same period, the spread on the index had widened from 3.3% to 6.4%.
