The quality profile of the high yield sector has slowly improved over the last decade, and now, high yield index quality is at a record high. Consequently, despite spreads only being near their 10-year average, the improved credit quality and a solid fundamental backdrop may represent an attractive entry point to the asset class.

U.S. high yield market BB/CCC ratio
Bloomberg U.S. High Yield Index, 2010–present

U.S. high yield market BB/CCC ratio from 2010 to Dec. 2022.

Bloomberg, Principal Fixed Income. Data as of December 1, 2022.

Over the last 10 years the credit quality profile of the high yield market has progressively improved. Since 2010, the BB to CCC ratio has nearly tripled to over 4.5x today, resulting in a record high index quality. Therefore, even though current spreads are near the 2010–2022 average of 468, today actually represents an attractive entry point into the market given its improved credit quality.

Historically, investors have used high yield (HY) vs. investment grade (IG) spreads to help determine relative value—but the changes in credit quality indicate a need for investors to rethink this traditional reference point. As high yield credit quality has improved, investment grade has deteriorated, with the share of BBB rated bonds in the Bloomberg U.S. Corporate Investment Grade Bond Index increasing from under 40% ten years ago, to around 50% today. So, the current investor sentiment that IG vs. HY spreads are rich is actually misguided, and the spread is reasonably reflective of the convergence of index quality.

Today’s HY market is one of fundamental strength, with an increasing level of secured bonds, near record interest coverage ratios, and low default rates informing a positive view of the asset class. Although further volatility is to be expected, given the strong fundamental backdrop and a historically strong credit quality, high yield can present an immense value for investors today.


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