“High-Yield Total Returns Near Their Highest Level in More Than 20 Years” ... Barings Asset Management Stresses Selecting High-Quality Credit

[Financial News] With total returns on global high-yield bonds nearing their highest level in more than 20 years, an analysis finds that the investment environment allows investors to earn income without substantially increasing credit risk. However, as differences between sectors and companies widen, analysts say it is important to select high-quality issuers rather than rely on a broad market rally.
On the 20th, Barings Asset Management said that a resilient economy, strong corporate earnings and qualitative improvements in the composition of the global high-yield market are supporting the investment environment.
The U.S. economy continues to show resilience, underpinned by consumer spending, fiscal support and investment related to artificial intelligence (AI). With long-term inflation expectations relatively stable, the rise in Treasury yields is seen as reflecting stronger growth more than a worsening inflation outlook. Corporate earnings are also supporting leverage management and companies’ ability to service interest payments.
Credit quality in the high-yield market has also improved. The share of BB-rated issuers in the global high-yield bond market has risen to 62%, while the share of CCC-rated issuers has fallen to 7%. This is seen as reducing the likelihood that credit risks at some vulnerable issuers will spread across the broader market.
Scott Ross, head of global high-yield investments at Barings, said, “The current high-yield market offers an environment where investors can expect attractive income without aggressively increasing their exposure to lower-rated bonds,” adding, “As differences in company fundamentals and capital structures widen, investors need to consider both financial flexibility and cash-generation capacity.”
AI infrastructure was identified as an area where both new investment opportunities and risks are growing. As financing for data center and power infrastructure investments increases, high-yield investment opportunities could expand, but increased bond supply could also weigh on the prices of existing bonds. Investment performance may also vary depending on project feasibility, regulation and the availability of power.
A selective approach is also needed in interest-rate-sensitive housing-related sectors and in Europe’s chemical and automotive sectors. Short-term high-yield bonds were seen as relatively attractive investments, particularly because they can provide income while reducing price sensitivity to interest-rate fluctuations.
Ross said, “Future performance is more likely to come from identifying the gap between prices shaped by supply and demand and companies’ actual fundamentals than from predicting the direction of the overall market,” adding, “Investors should focus on high-quality companies with resilient cash flows and the ability to manage their capital structures prudently.”
[email protected] Bae Hangeul Reporter