Five Reasons to Invest in High-Yield Bonds Today

As the US economy begins to feel the weight of the Federal Reserve’s rate hikes, investors have grown leery of US high-yield corporate bonds. On the surface, that makes sense. Historically, credit conditions soured when growth slowed. But instead of bracing for a wave of downgrades and defaults, we think income-seeking investors should embrace high yield. Here’s why.

Reason 1: Strong fundamentals late in the credit cycle.

If the US economy enters and remains in a low-growth phase, the high-yield sector isn’t at great risk of a downturn. But the banking crisis has increased the odds of a hard landing.

At the brink of most slowdowns, corporate fundamentals are typically already weak. And it’s true that high-yield issuer fundamentals are beginning to weaken now. But they’re starting from an unusually strong position at this late stage of the credit cycle.

Today’s high-yield bond issuers are in much better shape financially than issuers entering past slowdowns, 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 few years, even as profitability recovered. As a result, leverage and coverage ratios, margins, and free cash flow improved. This relative strength in balance sheets means corporate issuers can withstand more pressure as growth and demand slow.