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 and Investment-Grade Credit
Gershon M. Distenfeld is Senior Vice President and Director of High Yield and Investment-Grade Credit at AB, responsible for overseeing the investment strategy and management of all investment-grade and high-yield corporate bond portfolios and associated portfolio-management teams. Strategies under his purview span the credit and risk spectrum, from short-duration investment-grade corporate bond portfolios to regional and global high-yield portfolios, encompassing a range of investment approaches, objectives and alpha targets, from income-oriented buy-and-hold strategies to active multi-sector total return strategies, and including both publicly traded securities and private placements in developed and emerging markets. Distenfeld also co-manages AB’s award-winning High Income Fund, recently named “Best Fund over 10 Years” by Lipper from 2012 to 2015, and the award-winning Global High Yield and American Income portfolios, flagship fixed-income funds on the firm’s Luxembourg-domiciled fund platform for non-US investors. He also designed and is one of the lead portfolio managers for AB’s Multi-Sector Credit Strategy, which invests across investment-grade and high-yield credit sectors globally. Distenfeld is the author of a number of published papers, including one on high-yield bonds being attractive substitutes for equities and another on the often-misunderstood differences between high-yield bonds and loans. His blog “High Yield Won’t Bubble Over” (January 2013) is one of AB’s all-time most-read blogs. Distenfeld joined AB in 1998 as a fixed-income business analyst, and served as a high-yield trader (1999–2002) and high-yield portfolio manager (2002–2006) before being named Director of High Yield in 2006. He began his career as an operations analyst supporting Emerging Markets Debt at Lehman Brothers. Distenfeld 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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