Can U.S. high yield offer respite from the uncertainty?

What’s been happening in the U.S. high yield market?

After posting 8.2% return in 2024,¹  the U.S. high yield market has been very stable so far in 2025, despite various headlines with the potential to move markets on both the macro and geopolitical front. Whether it was the AI/Deepsake news at the end of January, the tariff announcements, or economic data flow and subsequent rate moves, equity markets have been experiencing day-to-day volatility as investors attempt to formulate their view on the direction of markets.

The U.S. high yield market, meanwhile, has delivered solid positive performance, with spreads initially tightening by around 30bps through January before drifting wider in February to today’s level at 280bps – still tighter than the start of the year.²  From a ratings perspective, the lowest-rated CCC segment continues to outperform single-Bs and double-Bs, with continued compression in the highest yielding segment of the market.³

On tariffs, we consider the U.S. high yield market to be quite well insulated, given its domestic focus. U.S. domestic corporates make up around 90% of the broad U.S. high yield index,⁴  and some sell-side reports estimate that less than 15% of U.S. high yield company revenues are generated abroad. This compares to investment grade which has a greater proportion of multi nationals and 27% of non-U.S. companies.⁵  That said, indirect impacts could come through supply chain disruption and a decline in business and consumer confidence, particularly given the potential inflationary feed through from tariffs. In our view, high yield sectors most at risk from escalating trade wars include Autos, Retail, and Consumer Products.

Technical factors also continue to be supportive for high yield, with sources of demand outstripping supply. On the primary market, new issue volumes are down on a YTD basis versus 2024 – partly due to rates volatility and tariff headlines but also due to some deals being financed in the leveraged loan market, which has seen record gross issuance for each of the first two months of 2025.⁶

What is the outlook for U.S. high yield?

We expect the Federal Reserve to remain on hold for the rest of 2025, meaning that bond yields should continue to trade in a range around current levels and income will remain the main driver of returns. Importantly, however, the economics of refinancing is much improved for issuers today, with the difference between the average U.S. High Yield market yield at 7.2% and average coupon at 6.4% converging to around 80bps, compared to levels higher than 300bps over the past couple of years.⁷

This should encourage issuers to continue refinancing and, already, we have seen around 75% of the $40bn of new high yield bond issuance YTD being used for refinancing – a similar level to 2024.⁸  This has left a mere $30bn of high yield bonds maturing in 2025.⁹  Importantly, 60% of the high yield bond market set to mature in 2025 is double-B rated, compared to 0% in the loan market.¹⁰

As the year goes on, we expect M&A related issuance to pick up, given President Trump’s championing of deregulation and “business friendly” leadership appointments in key regulatory bodies. This typically takes the form of investment grade companies buying high yield companies or larger high yield companies buying smaller high yield companies, which could lead to investment opportunities.

We continue to believe that spreads, albeit tight relative to historical standards, are justifiably expensive given that the U.S. high yield bond default rate has continued to decline, reaching 0.3% in January excl. distressed exchanges or 1.4% incl. distressed exchanges.¹¹  Also, due to structural changes in the high yield market such as improving credit quality, the higher percentage of secured bonds, better liquidity, and that the high yield bond market today is at a record short duration, comparing spread levels today to the past 15-20 years is perhaps inherently flawed.

As well as these structural changes, high yield market fundamentals have remained very resilient with balance sheets generally healthy, leverage remaining low, maturities pushed out, and interest coverage still at levels above post-Global Financial Crisis averages.

Although bouts of volatility are likely throughout 2025, we believe that the carry in high yield could compensate investors for short-term uncertainty. In other words, we believe high yield investors are getting paid to wait until more clarity emerges.

Where are we seeing potential in this environment?

Across U.S. high yield approaches, with plenty of noise on the macro front, investors may remain disciplined within fundamental credit selection process, aiming to find value by determining when a bond will likely come out. This might mean identifying a bond that could stay out longer than what the market prices or sometimes determining a better value in a bond that may come out earlier than what the market is pricing.

In our opinion, short duration continues to show potential given the volatile rates environment. At the same time, the U.S. high yield curve is still relatively flat despite recent U.S. treasury curve.

steepening, meaning capturing 85-90% of the overall market yield, for much less duration could be an appealing approach, in our view.

Further up the risk spectrum in higher total return seeking approaches, investors may consider more defensive positions, given the spread compression in the highest yielding segments of the market. Instead, idiosyncratic opportunities and ensuring that highest conviction ideas are reflected in terms of position sizing may interest investors seeking to use any potential volatility as a catalyst to add back more risk to their approach.

Overall, we believe that the end of the low interest rate era has allowed high yield to its proper role in a balanced portfolio: providing unique diversification qualities and the potential for equity-like returns with much less volatility. This, we believe, means that sticking with the asset class as a core holding has the potential to be rewarded over time.