Breaking Down Borders in High Yield

After a multiyear rally, many high-yield investors are looking for new strategies to better balance risk and return. We don’t think a deep dive into riskier credits is the answer. Instead, investors should consider moving beyond traditional boundaries—both geographic and in credit rating.

Casting a Global Net for High Yield

European and Asian high-yield investors are accustomed to thinking globally for their high-yield allocations. The fact that the US high-yield market developed first and was for many years the dominant issuing region explains some of their global viewpoint. In contrast, US high-yield investors tend to stick close to home.

But in recent years Asia, Europe and emerging regions have seen their high-yield issuance expand, diversify and become more liquid. The result? US investors may benefit from looking further afield than they have in the past. 

Fifteen years ago, less than 1% of the corporate high-yield market was issued outside the US. Today, as shown in the display below, US-only investors are cutting themselves off from nearly a third of the high-yield market.

US-Only Investors Are Missing Out

But those willing to reach across borders (and able to conduct in-depth market, political and issuer research in other regions) can frequently find opportunities in developed and emerging markets with equivalent or  better credit ratings than home-field issuers, higher yields, and higher potential return. What’s not to like about that?   

Crossing the Investment-Grade Border

We think some of the best ideas for high-yield investors in all regions right now may be outside the traditional high-yield credit-rating zone.

The way we see it, there’s no unbreachable wall between investment-grade and high-yield securities. It’s a continuum, and in all three of the major issuing regions there are numerous BBB and split-rated issuers with yields comparable to their lower-rated cousins. 

So, investors shouldn’t fence in their high-yield allocation. One option is to invest part of a longer-maturity high-yield allocation in BBB-rated and split-rated bonds, and focus intermediate- and shorter-maturity exposures in issues rated BB and lower. In our view, this may make a portfolio better able to weather a downgrade along the way. It might also allow a portfolio to benefit from a rising star, because some split-rated bonds could be headed for a passport out of the high-yield universe.    

Don’t Be a Yield Hero

By diversifying across regions and selectively moving up in credit, there’s no need to pursue higher yields simply by chasing highly speculative credits. Tight markets bait investors into taking bad risks, and we’re beginning to see this occur as a stream of investors reach down into CCC-rated bonds and so-called covenant-lite bank loans. While opportunities do exist for investors who research and monitor these issuers carefully, overall we don’t think these segments compensate investors for their risks. 

With so many opportunities to diversify and find strong securities globally and to reach up and find value in investment-grade bonds, we don’t think there’s any need for high-yield investors to be yield heroes.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams. Past performance of the asset classes discussed in this article does not guarantee future results.

Gershon M. Distenfeld, CFA

Director—High Yield
Gershon M. Distenfeld is Senior Vice President and Director of High Yield, responsible for all of AllianceBernstein’s US High Yield, European High Yield, Low Volatility High Yield, Flexible Credit and Leveraged Loans strategies. He also serves on the Global Credit, Canadian and Absolute Return fixed-income portfolio-management teams, and is a senior member of the Credit Research Review Committee. Additionally, Distenfeld co-manages the High Income Fund and two of the firm’s Luxembourg-domiciled funds designed for non-US investors, the Global High Yield and American Income Portfolios. He has authored a number of published papers and initiated many blog posts, including “High Yield Won’t Bubble Over,” one of the firm’s most-read blogs. Distenfeld joined the firm in 1998 as a fixed-income business analyst. He served as a high-yield trader from 1999 to 2002 and as a high-yield portfolio manager from 2002 until 2006, when he was named to his current role. Distenfeld began his career as an operations analyst supporting Emerging Markets Debt at Lehman Brothers. He holds a BS in finance from the Sy Syms School of Business at Yeshiva University and is a CFA charterholder. Location: New York

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