Despite the year-to-date sell-off, we maintain a favorable fundamental outlook for high yield. Spreads widened significantly in the second quarter and are now wider than their historical averages, while default rates remain well below their long-term averages. Though defaults may tick slightly higher from here due to inflation and a more hawkish Fed, they should stay below their historical averages for the foreseeable future, as recent refinancing activity by companies has extended upcoming maturity walls. Technical conditions remain supportive as year-to-date outflows have been met with a quiet new issue calendar. Our new issue participation has been very limited, and we continued to find better opportunities in the secondary market.

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Though our outlook for high yield remains constructive, risks remain. Inflation represents a key risk moving forward, as issuers' borrowing costs will likely increase as central banks raise rates to combat price pressures. Amid rising borrowing costs and persistent inflation, we are targeting issuers with healthy levels of capital and limited borrowing needs in the future. We are also closely monitoring issuers' ability to pass higher costs through to consumers and will favor companies that are able to do so most effectively. Lastly, given increased risks around the potential for a recession, we continue to stress-test credits for resiliency in such an environment.

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We started the year with tight spreads and average prices near par. However, the year-to-date sell-off has led to wider spreads, lower dollar prices, and has created more total return opportunities in our market. Additionally, as rates have risen year-to-date, yields are higher today than they were at the start of the year. Thus, prospects for income have improved. Our focus will continue to be on security selection driven by fundamental, bottom-up research as our primary source of alpha, as it has been for us over the long term.