Don't call it junk

Current high-yield valuations are elevated compared to historical medians, suggesting caution regarding maximum allocations to this asset class. However, improved market quality is evident, with an increase in BB-rated bonds and a decrease in CCC-rated bonds, supported by the strong financial position of issuers benefiting from a robust economy and low fixed-rate debt.

Credit spreads are currently tight but are not expected to spike to the extremes of prior economic downturns. Meanwhile, floating-rate loan issuers are facing challenges due to rising interest costs, resulting in declining interest coverage and increased risk of downgrades.

Concerns about upcoming high-yield maturities are mitigated by a strong market in 2024, allowing issuers to refinance without significant penalties. Additionally, high-yield bonds offer diversification benefits due to their correlation to equities and lower correlation to high-quality bonds.

Overall, high-yield companies, particularly in stable industries, are well-positioned to navigate refinancing at higher rates.