Barings Asset Management: "All-In Yields on High-Yield Bonds Near Highest Level in More Than 20 Years"

Attractive Income Without Taking on Excessive Credit Risk

Barings Asset Management said on October 20 that the all-in yield on global high-yield bonds is approaching its highest level in more than 20 years. It said this has created an environment in which investors can expect attractive income without taking on excessive credit risk.

According to Barings Asset Management, the U.S. economy continues to show resilience, supported by consumer spending, fiscal support and large-scale investment related to AI. With long-term inflation expectations relatively stable, the rise in Treasury yields largely reflects strong economic growth rather than a sharp deterioration in the inflation outlook, the firm said. Healthy corporate earnings are also supporting leverage management and debt-servicing capacity, giving companies room to absorb higher borrowing costs.

Scott Ross, Head of Global High Yield Investments at Barings Asset Management

Another factor contributing to stability is the improved quality of the market’s composition. In the global high-yield bond market, the share of BB-rated issuers has risen to 62%, while the share of CCC-rated issuers has fallen to 7%. Barings Asset Management said this improvement in credit quality could act as a buffer, reducing the likelihood that credit risks at some vulnerable issuers will spread across the broader market.

"The current high-yield market offers an environment where investors can expect attractive income without increasing their exposure to lower-rated bonds excessively," said Scott Ross, Head of Global High Yield Investments at Barings Asset Management. "However, despite the market appearing broadly stable, differences in companies' fundamentals and capital structures are widening, so investors should assess both financial flexibility and cash-generation capacity."

AI infrastructure is one area where both opportunities and risks are growing. The large amounts of capital needed for data centers and power infrastructure offer new investment opportunities for high-yield investors. On the other hand, a rapid increase in related bond issuance could put pressure on the prices of existing bonds. Investment outcomes could also vary significantly depending on project viability, regulation and access to power. Ross said that direct AI-related exposure is lower in the European high-yield market than in the U.S., and investment opportunities are therefore likely to differ by region.

By sector, investors should pay close attention to interest-rate-sensitive housing-related businesses. Many U.S. homebuilders maintain relatively sound financial positions, but some development projects that took on debt based on more favorable operating conditions in the past could face greater pressure.

In Europe, the chemicals and automotive sectors are being affected by weak industrial demand and intensifying competition from lower-cost rivals. Investors should therefore carefully distinguish among companies within each sector based on their competitiveness and debt burdens, Ross said.

Shorter-maturity high-yield bonds stand out as particularly attractive investments, he said. Short-term high-yield bonds can offer attractive income while keeping price sensitivity to interest-rate movements relatively low. If market interest rates fall, investors may also benefit from bond price appreciation. However, with differences in issuers' financial health and refinancing capacity widening, investors should carefully assess cash flow and capital structures rather than simply chasing high yields, he added.

"Going forward, performance is likely to come less from predicting the overall direction of the market and more from identifying discrepancies between prices shaped by supply and demand and companies' actual fundamentals," Ross said. "Investors should focus on high-quality companies with solid cash flows and the ability to manage their capital structures prudently, while closely monitoring shifts in supply and demand resulting from increased AI infrastructure-related bond issuance, as well as company-specific fundamentals."

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