by Eric Williams, Head of Capital Structure, Northern Trust
We explore how strong fundamentals and a resilient economy may position high-yield bonds as a potentially compelling choice in todayās fluctuating market.
Throughout the first half of 2024, investors were allocating to high-yield bonds with goal of achieving attractive returns combined with important diversification benefits. These returns were driven by expectations of a mixture of high carry and a more modest spread compression potential. However, recent market volatility has led to sharp repricing of high-yield bonds, improving valuations that may yield equity-like returns with significantly reduced volatility. Letās take a closer look.
High-yield bonds in the current market environment are well-suited for risk allocation, as their potential for higher returns can help offset many of the risks present to investors. While market uncertainty is expected to continue due to geopolitical concerns and the upcoming U.S. election, corporate fundamentals remain strong, and the macroeconomic backdrop remains favorable. We view concerns around the credit and default cycle to be unfounded given the fundamental strength of corporate balance sheets and the strength of the capital markets, which help to alleviate funding pressures.
We remain confident in maintaining a pro-risk stance, as the fundamental outlook remains solid. Despite recent volatility, we see no need for significant adjustments and recommend staying the course. High-yield bonds are well-positioned, with the diversifying effects of interest rates adding further support. Whether compared to the S&P 500 or relative to a traditional 60/40 portfolio, high yield has consistently delivered higher risk-adjusted returns over the past two decades.
Our risk framework suggests maintaining risk positions within dedicated fixed-income and multi-asset portfolios, with high yield bonds remaining a key component. While recent market developments havenāt materially changed the fundamental picture, we are monitoring sources of potential risks. Economic growth does appear to be moderating in line with monetary policy goals, and most corporate profit outlooks are ahead of expectations. As a result, we have no change in view about the trajectory of these macroeconomic drivers and their impact on the fair value of high yield spreads. In our view, the recent spike in volatility presents an opportunity for investors to consider the potentially attractive risk-adjusted returns of high-yield bonds.
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Eric Williams
Head of Capital Structure
Eric Williams is head of capital structure and a senior portfolio manager on the global fixed income team at Northern Trust Asset Management. He has broad oversight of our actively managed leveraged credit platform and is the lead portfolio manager on several leveraged credit strategies across the firm.
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Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
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