My Changing Perspective on US High Yield Bonds

Revisiting USHY’s Outlook for 2025

When I first assessed the state of US high yield bonds (USHY), my initial pessimism overshadowed any potential for a positive outlook. However, upon conducting a deeper analysis, I have come to realize that the situation may not be as dire as I initially thought. Despite low spread levels, there are several factors that indicate a less wicked outlook for USHY in 2025.

Default Rates and Bond Ratings

USHY holds exposure to BB and B-rated bonds, which traditionally carry a higher risk of default. Surprisingly, in 2025, these bonds experienced a default rate below the historical average. This unexpected resilience suggests that the credit quality of US high yield bonds may be more robust than previously anticipated.

Rising Net Leverage in Investment Grade Bonds

One potential concern on the horizon is the rising net leverage in investment grade (IG) bonds. This increase in leverage could lead to more fallen angels – bonds that are downgraded from IG to high yield status. However, it is worth noting that the market seems to be pricing in this risk rather than mispricing the risk associated with high yield bonds. This adjustment in pricing indicates a more rational assessment of the potential risks.

Impact on Individual Investors

For individual investors, the changing dynamics of the US high yield bond market may present both opportunities and risks. With a more positive outlook for 2025 and a better understanding of the factors influencing bond performance, investors may consider including USHY in their portfolio with a more informed perspective.

Global Implications

The implications of a less severe outlook for US high yield bonds extend beyond individual investors to the broader global market. A more stable USHY market can have a ripple effect on other asset classes and financial markets worldwide, potentially contributing to a more balanced and resilient global economic landscape.

Conclusion

My initial pessimism on US high yield bonds was perhaps too severe, as a deeper analysis has revealed a more nuanced and potentially positive outlook for 2025. By considering the factors influencing bond performance and market dynamics, investors can make more informed decisions about including USHY in their portfolio. The evolving landscape of high yield bonds not only impacts individual investors but also has broader implications for the global financial market.