High yield credit and subordinated debt: enhanced income possibilities

High yield credit and subordinated debt: enhanced income possibilities

After a dramatic market reset in 2022, the high yield market is now living up to its name. Yields and spreads in the asset class are higher than they have been for quite some time, creating opportunities for investors to lock in higher levels of income for the years to come. 

Recent analysis from Invesco’s Global Market Strategy Office suggests that we may have already started the transition to the recovery phase of the economic cycle. In environments like this, riskier assets like high yield credit typically outperform their “safer” counterparts. Against this backdrop, the outlook for the asset class looks attractive.

Of course, investing in high yield bonds always comes with risks. If the economic outlook turns out to be more negative than anticipated, we could see credit stress and defaults in the asset class. That said, today is not 2008. Banks and corporates have generally entered this period with strong fundamentals and balance sheets. In other words, the risks this time are not systemic, as they were leading up to the Global Financial Crisis (GFC).

Even if a recession does materialise across global economies, there are some arguments that could work in favour of high yield, such as the lower supply outlook, the improved financial characteristics of high yield companies, and the slightly better credit quality we have seen since the GFC.

With this in mind, we take a closer look at the asset class. We assess its key features, benefits and risks. We also share some case studies and outline how high yield assets behave across a full market cycle.

Finally, for investors who are interested in exploring more innovative areas of the fixed income universe in their search for higher yields, we delve into subordinated debt and hybrid securities. How do they differ from high yield credit, and what can they bring to a portfolio?

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