Global High Yield Bond Funds invest in a diversified portfolio of bonds issued by corporations and occasionally governments worldwide, rated below investment grade (BB/Ba or lower), offering higher interest rates due to their increased credit risk.
This time last year, I was somewhat sceptical as to the prospects for high yield. My rationale was that an increasing number of companies would be returning to high-yield markets to refinance over the coming years. Refinancing needs trend steeply upward until 2029. That still seems to be the case. If inflation remains sticky, then so, in all likelihood, will refinancing rates.
However, the sky hasn’t fallen on our heads. Over the year, high yield has outperformed other bond sectors—dollar and sterling more than global—but the latter has still returned a respectable 8.67% for the 12 months to the end of February. The Global Corporate Bond sector, by contrast, had returned 6.81%.
Was I overly cautious (a euphemism for “plain wrong”), or is optimism over the sector equivalent to the man who throws himself off a 20-storey building and shouts “so far, so good” to those watching from the fifth as he passes?
For what it’s worth, the market consensus is with me. Inflows to Global High Yield over the year were a wafer-thin £84m—barely enough to pay for a round in a central London pub these days. Over three years, despite respectable returns of 18.23%, the sector suffered redemptions of £5.5bn. But consensus, from tulip bulbs to tech, is often wrong.
The wisdom of crowds may work when the decisions of the individuals within those crowds are not influenced by others, but when herding occurs—as it so often does—those crowds can be as dumb as a brick.
So, for balance, let me put the case for the defence. While there is a refinancing spike on the way, the earnings of high-yield issuers are robust, and the credit quality has improved. That’s credible, with an average of 83% of these funds being in B or BB-rated credit—the highest two bands of high yield. Whether earnings are, indeed, robust enough to weather refinancing at substantially higher rates should inflation remain elevated, only time will tell.
In a world of slowing growth, which IMF forecasts suggest is unfolding currently, high yield could well do better than equities, which are the quintessential growth asset. High-yield issuers don’t necessarily have to grow for their bonds to fulfil their role in your portfolio. They just need to pay out what they have agreed to.
All things being equal, that’s a decent case, backed up by some decent recent returns. But with economic risks on the rise, it’s certainly worth bearing in mind that these can impact on your portfolio.
The top-performing fund in the sector over three years is the PIMCO US Short Term High Yield Corporate Bond Index UCITS ETF USD Inc fund, as it was last year. As the name suggests, it’s passively managed and short duration—meaning it will have been relatively less impacted by rising rates—though this won’t help as rates fall.
However, its exposure to BB and above rated credit has gone from 83% last year to 79% this, so is running marginally greater credit risk than the sector as a whole. It’s interesting, as HY isn’t generally seen as being the terrain of passive management given the inherent risks of the asset class.
One example is that the index gives you exposure to issuers in proportion to the debt they have issued, so you are therefore overweight the most indebted entities—something active managers have the discretion to avoid. That’s less of a worry with investment grade but may be something to be wary of in this corner of the market should rates stay elevated.
Keep an eye on that refinancing spike.
Table 1: Top-Performing Global High-Yield Bond Funds Over Three Years (with a minimum five-year history)
All data as of February 28, 2025; Calculations in GBP
Source: LSEG Lipper