As rates have shifted higher, high yield is now living up to its name.
Since 2008, there have been relatively few opportunities to invest in high yield at yields above 8%. Many investors who allocated to the asset class during these times, benefited from double-digit total returns over the subsequent one-, three- and five-year periods.
Since 2008, the average annualized forward return for the Bloomberg US Corporate High Yield index ranged from approximately 11% to over 18% when the starting yield to worst was higher than 8%. The results are similar for the global high yield market.
Past results are not a reliable indicator of future performance.
Assessing spreads and future return potential
Exhibit 3: 5-year forward high yield index returns based on starting OAS
Bloomberg US Corporate High Yield Index (monthly data from January 1994 through May 2023)
ast results are not a reliable indicator of future performance.
Time in the market, not timing the market
Overall, we believe yields around 8% can present attractive opportunities for long-term investors. Depending on your appetite for volatility, this may not be the environment to stretch for unnecessary risk in lower-quality CCC bonds, particularly when there are interesting opportunities to generate solid returns in higher-quality high yield bonds.
In this environment, we think there is a case to be made for long-term investors to consider gradual increases to high yield in an effort to capitalize on attractive yields, provided they can weather some short-term market swings. Spread widening may present opportunities to further increase allocations, however timing the bottom or top of the market can be challenging. After all, it is time in the market, not timing the market, that matters in high yield.
Over the long term, high yield has tended to deliver competitive risk-adjusted returns compared to many other fixed income assets, and even equities. As such, we believe the structural case for high yield remains very much intact. And throughout the remainder of the year, we expect high yield has the potential to generate attractive carry and solid coupon-like returns.
Article written by Kevin Bakker, CFA and Co-head of US High Yield; Ben Miller, CFA and Co-head of US High Yield; Thomas Hanson, CFA and Head of Europe High Yield; and Mark Benbow, Investment Manager. All of them of Aegon Asset Management.
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