Three Reasons It’s Time to Add High-Yield Bonds

Below are three reasons high-yield bonds look attractive—and one reason to seize the day.

Reason 1: Strong long-term fundamentals.

When credit conditions tighten and demand slows, corporations can struggle to secure cheap and adequate funding. That struggle is a function of a company’s creditworthiness at the start of the slowdown: A company that’s already overstretched will run into problems very quickly when the spigot dries up.

At the brink of most slowdowns, corporate fundamentals are typically already weak. But today’s high-yield bond issuers are in much better shape financially than issuers entering past recessions, thanks in part to an extended period of uncertainty surrounding the coronavirus pandemic.

This uncertainty led companies to manage their balance sheets and liquidity conservatively over the past two years, even as profitability recovered. As a result, leverage and coverage ratios, margins, and free cash flow have improved. This relative strength in balance sheets means corporate issuers can withstand more pressure as growth and demand slow.