The global high yield market holds a crucial position within the financial landscape. Despite its association with higher risk, it presents unique opportunities and advantages, highlighting its significance to investors and the global economy. As 2025 unfolds, the market exemplifies resilience and potential. Its stellar performance in 2024, despite a challenging interest rate environment, underscores its value for investors seeking substantial returns and diversification.
Resilience Amid Rate Hikes
In 2024, the global high yield market showcased extraordinary resilience, achieving an annual return of 8.27%1 despite notable interest rate increases.
A standout feature from 2024 was the narrowing of spreads by approximately 77 basis points over the year2, indicating favourable credit conditions and a low default environment. With global default rates below 2.0%3, the high yield market offers a relatively stable investment option. This stability is bolstered by growth in developed markets, ample access to financing, robust capital flows, limited net new supply, and prudent underwriting standards.
Following the US November elections, market sentiment shifted from expectations of soft landings and lower inflation to a “no landing” economic scenario. This shift raised concerns about resolving inflation issues and sparked discussions about the possibility of 6% US Treasury yields. In this context, the high yield market provides an attractive alternative for investors seeking higher returns. Despite spreads being near post-GFC lows, absolute yields exceeding 7% continue to draw yield-oriented investors.4
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Opportunities exist in sectors with strong outlooks, including financials, energy, entertainment & leisure, and cable. A selective approach to higher-yielding investments with turnaround potential can drive outperformance.
Emerging Opportunities in High Yield
As we progress further into 2025, several areas within the high yield market present compelling opportunities. In the financial sector, we favour large systemically important banks in Latin America and Central and Eastern Europe, while in the US, our preference is for select non-bank financials such as insurance brokers with stable, non-cyclical business models. In the energy sector, we find attractive opportunities in companies focused on cash flow generation and deleveraging, with several investment-grade upgrade candidates. The entertainment and leisure sector also presents opportunities, driven by consumer demand for experiences over goods; to capitalise on this theme, we overweight European cruise lines, gyms, and amusement parks.
Geographically, we are underweight US high yield and remain overweight European high yield, albeit to a lesser extent, as recent outperformance has made valuation less attractive. Our neutral positioning in emerging market high yield is driven by tight valuations balanced by the robust fundamentals of the names we hold and the attractive overall yield.
Conclusion
The global high yield market remains a vital component of a diversified investment portfolio in 2025. Despite rising interest rates, the market has demonstrated remarkable resilience, supported by strong fundamentals and low default rates.
Periodic market volatility has created attractive entry points, allowing investors to purchase high yield bonds at lower prices and potentially benefit from higher returns as the market stabilises. Strategic sector exposure, particularly in growth sectors like energy and technology, further enhances the appeal of high yield bonds. Staying informed about market dynamics and adopting strategic investment approaches will be key for investors looking to capitalise on opportunities within the global high yield market in 2025.
[1] Source: ICE BoFA Global High Yield Index AUD Hedged
[2] Source: ICE BoFA Global High Yield Index
[3] J.P. Morgan Chase & Co. US Default Rate, Based on Par Amount.
[4] Source: Bank of America
