High yield fixed income seems to be making a comeback in 2023 after facing an historically bad year for bond markets in 2022. And against a backdrop of lowering inflation and a slightly more bullish (or at least, less bearish) investor sentiment, triple-Cs in particular are doing quite well. According to a note from fixed income specialist BondBloxx Investment Management, if the Federal Reserve can implement a soft landing, triple-Cs may be the category within high yield that benefits the most in 2023.
“In January, triple-Cs had a really big month,” BondBloxx co-founder Joanna Gallegos told VettaFi at Exchange. “They outperformed all the other rating categories.”
The widening of credit spreads and the rise in yields that triple-Cs experienced in 2022 has reset the category’s relative value for 2023, offering investors the highest compensation for taking CCC risk since the crash of March 2020.
Even if credit spreads for CCCs were to widen this year, BondBloxx noted that the much higher coupon income available in this credit rating category may serve as a cushion for investors, thereby increasing the current attractiveness of opportunistic investment in CCCs.
“Although we expect continued market volatility, there are reasons to be optimistic for the CCC-rated sector in 2023,” according to BondBloxx. “The much higher starting yield levels for CCC-rated bonds provide cushion against possible spread widening in the coming year.”
The strong start to the year in terms of capital markets access is another tailwind for lower quality credits, as access to the primary markets remains critical to address funding needs.
Fixed income investors have the opportunity to reposition their portfolios in the aftermath of 2022’s historic market environment. Targeting specific sectors of U.S. high yield market, including CCC-rated bonds, may offer outperformance potential in 2023.
The BondBloxx CCC Rated USD High Yield Corporate Bond ETF (XCCC) provides exposure to U.S. high yield corporate bonds’ lowest credit quality tier, which can offer compelling yield. XCCC seeks to track the investment results of the ICE CCC US Cash Pay High Yield Constrained Index, which contains all bonds in the ICE BofA US Cash Pay High Yield Index rated CCC1 through CCC3, but caps issuer exposure at 2%
According to BondBloxx, the fund’s index started 2023 at a yield-to-worst of 15%, the highest yield since May 2020. Its 30-Day SEC Yield as of Jan. 31 was 13.3%.
XCCC carries an expense ratio of 0.40%.
For more news, information, and analysis, visit the Institutional Income Strategies Channel.