High yield: Why spreads may prove resilient | Insight Investment

Some investors may be wary about the high yield bond market given recent spread tightening, but high yield companies have demonstrated remarkable resilience and structural market changes may justify tighter spreads than historically observed. Barring a meaningful recession or crisis, we expect high absolute yields, improved credit quality and low defaults to sustain demand for the asset class.

High yield is not the same as in the past: The credit quality of the global HY market has significantly improved over the years. In Europe and the US there has been a shift from an average rating of B to BB over the last decade. Despite recent increases in leverage ratios, they remain below long-term averages. Interest coverage ratios have also remained healthy, supported by low funding levels locked in by many companies.

Default rates are running at low levels: This reinforces our view that global high markets are significantly more resilient than in the past.

The investor base has changed: The high yield market has seen a shift from retail to institutional investors, contributing to a more stable investment environment.