The renewed opportunity set in fixed income is enabling investors to achieve attractive returns while taking on less risk.
High yield is particularly well-positioned. This will provide an attractive total return opportunity that can help protect investors against rate increases or spread events. Below-average prices combined with above-average yields and reasonable credit fundamentals create a compelling opportunity in high yield.
“From our angle, we’ve seen a lot of renewed interest in high yield recently from investors looking to de-risk from equities. They’re view the income return on bonds as providing a more stable and reliable source of return relative to equities,” Ashley Wiersma, portfolio specialist at T. Rowe Price, said during VettaFi’s Income Strategy Symposium on October 27.
Ashley Wiersma, Portfolio Specialist, T. Rowe Price
Constructive High Yield Credit Fundamentals
Overall, spreads have been reasonably well behaved in the recent environment, Wiersma said. Two key factors are keeping spreads range bound: an increase in the overall quality of high yield as well as the limited amount of debt coming to maturity this year and next.
T. Rowe Price’s high yield index has a much larger portion of the market that’s rated BB relative to the amount of CCC rated debt seen in the past, she noted. About 50% of the high yield market today is rated BB.
Secondly, many companies took advantage of low rates to refinancing and extending out their debt during the pandemic.
“When looking out at future maturity walls, there’s a really limited amount of debt that’s coming due in our high yield market either this year or next,” Wiersma added. “It’s really not until 2025 or 2026 that we see meaningful maturity walls starting to hit our market.”
“In terms of spread expectations moving forward, obviously, no crystal ball. But we think these trends are going to generally continue to support our market and keep spreads somewhat range bound through year end,” she said.
Below Average Prices Present a Compelling Opportunity
High yield prices are currently below historical averages, creating an attractive entry point for investors.
Last year, the high yield space saw a notable sell-off, according to Wiersma. Although prices have recovered some this year, the average price of the high yield market is still relatively cheap.
“At the same time, we’ve seen this Fed hiking cycle that’s helped pump yield back into fixed income markets. The yield to worst on our index today is nearing a decade high after effectively doubling since the start of last year,” Wiersma said. “We really think low average prices combined with above-average yields, and reasonable fundamentals should position investors well longer term.”
T. Rowe Price offers high yield exposure via the actively managed T. Rowe Price U.S. High Yield ETF (THYF). THYF seeks to generate alpha by investing across the entire high yield universe, spanning all industries, ratings, and market caps.
“We think our size and concentrated approach really helps us to be flexible and nimble, adjusting our portfolios as market conditions change,” Wiersma said.
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