Looking beyond tight credit spreads: The opportunity in high yield bonds

Tight corporate credit spreads¹ may continue to dominate the narrative across global high yield markets—but they don’t tell the full story. All‑in yields remain high, default rates are low, and improved credit quality and liquidity paint a compelling picture. Taken together, these four factors not only help explain spread compression, but also make a strong case for allocating to high yield bonds. 

All‑in yield matters

All‑in yields remain high and appealing from an income generation perspective. Historically, investing at such levels has been a precursor to attractive returns in subsequent periods (see Fig. 1).

Interestingly, these yields can sometimes understate the true return potential. In sub‑investment‑grade markets, bonds are often refinanced prior to maturity—a dynamic that can meaningfully impact expected yields yet is usually not reflected in quoted yield‑to‑maturity figures. Accounting for this early takeout for bonds trading below par typically results in total returns higher than advertised yields, further enhancing the appeal of high yield on an absolute basis.

A comparison with other asset classes, such as equities, is compelling too. As of May 21, the J.P. Morgan Domestic High Yield Index offered a 7.13% yield to worst, more than three percentage points higher than the earnings yield on the S&P 500 Index². The gap is notable not only from an income perspective, but also because equity volatility has historically exceeded high yield bonds. Superior yield, meaningfully lower volatility, and potentially lower downside risk relative to equities present a strong case for the asset class.

Improved credit quality

The overall credit quality of high yield corporate credit indexes has improved considerably over the last 15 to 20 years. Using the ICE BofA Global High Yield Index as a proxy, 62% of bonds are rated BB (the highest sub investment grade rating) as of March 31, 2026, up from only 39% in 2007. This improvement in credit quality is also evident at the other end of the high yield credit spectrum. CCC-rated issuers fell from an average of around 15% of the index in 2007 to just 7% at the end of March this year.³

Another indication of improved credit quality is the increase in secured bond issuance. This suggests higher recovery rates⁴ as investors can claim on specific assets or collateral. Furthermore, a key post global financial crisis (GFC) trend has been a sharp decline in the amount of smaller deals. This matters because smaller deals tend to be more speculative, as the issuers are often earlier‑stage and more leveraged, which means credit profiles are usually weaker. Fewer small deals point to healthier market conditions.

Additionally, high yield companies are generating higher earnings on average than they did prior to the GFC, providing them with greater financial flexibility. The average maturity and duration profile of high yield issuers have also declined meaningfully over time, reducing both volatility and the risk premium required by investors. Overall, improvements in credit quality of the high yield market have contributed to tighter credit spreads.

Low default rates

Default rates remain below historical averages across global high yield markets, a trend we expect to continue. While concerns around the software sector and private credit are currently elevated, we do not believe this signals broader issues in credit markets. High yield companies are underpinned by robust fundamentals. Cash ratios (a measure of liquidity that shows a company’s ability to cover its short‑term obligations) are elevated, while leverage ratios (which show how much of a company’s capital comes from debt) remain relatively healthy.

High yield companies have also demonstrated considerable resiliency in recent years, absorbing multiple shocks, from Covid, to the 2022 energy crisis, to tariffs. Taken together, these attributes are supportive of high yield companies and should help them navigate this year’s energy price shock.

Enhanced liquidity

In addition to default risk, high yield investors should be compensated for volatility and illiquidity risk. However, liquidity in the global high yield market has improved markedly in recent years, driven by the proliferation of electronic and portfolio trading. Bid/ask spreads (the gap between what buyers will pay and sellers will accept) have also narrowed, a further sign of liquidity improvement.

Therefore, structurally better liquidity implies a lower required liquidity premium. This is another factor contributing to spreads tightening.

Benefits of a global approach in today’s markets

The global high yield market has undergone a meaningful transformation over the last two decades. It is now approximately six times larger than it was in 2000—an expansion that has created a more global and varied investment universe spanning a wide range of countries, sectors, and issuers. This broader opportunity set may enhance diversification⁵ by providing exposure to different economic and credit cycles, which is especially important for investors in today’s markets.

There is no disputing that spreads are tight relative to historical levels. However, this must be viewed in the context of meaningful structural changes to the global high yield market. Credit quality has improved, companies are generally in robust health, and liquidity is better. These factors, combined with attractive and competitive all‑in yields, make a compelling case for the asset class.