High yield bonds have advanced from a specialty fixed income investment to a strategic, mainstream asset held across most diversified portfolio allocations. Once viewed as being the ”penalty box” for wayward public debt issuers, the sector has transformed into a dynamic marketplace to help meet corporate capital needs and investor appetites.
Over the years, a multitude of forces have come together to bring high yield bonds into an asset class that combines earlier high yield principles with new techniques that may deliver high current income for investors.
The evolution of high yield has been supported by low interest rates, tight credit spreads, shifting norms in corporate financial management, regulation, changing risk tolerances and new portfolio construction models. High yield investing has grown and transformed over time into a familiar but distinctly different animal.
In December 1990, according to Barclays Capital LIVE, the sector possessed an average rating of single B, which increased to a single B+ average by 2017.
Consequently, the high yield sector experienced an increase in average credit quality with a significant decline in the average spread versus Treasury obligations. These changes were driven by developments in both the investment environment and corporate capital management.
Specific events always are shaping markets and the way investors choose to define their risk appetites. The 2005 downgrades of General Motors and Ford Motor was a transition point when two mega-issuers suddenly joined the high yield sector. This introduced a level of idiosyncratic company risk into various market-weighted high yield indexes.