Gimme Credit

Summary

• High yield bonds returned 8.2% in the previous year & 13.5% in 2023, resulting in a 10.8% annualized return for the 2023-24 period.
• Average high yield bond yields to maturity have declined from roughly 9.5% to just above 7% due to reduced risk spreads & base rate cuts.
• Current yield spreads stand at approximately 290 basis points, which is one of the narrowest levels on record since high yield bonds began in 1977-78.
• Historical data from 1986 through 2024 shows high yield bonds generated an annualized return of 7.83% compared to 5.14% for 10-year Treasurys.
• The average annual credit loss in the high yield universe over the 39-year period was about 230 basis points, suggesting current spreads are sufficient to offset historical defaults.
• The median default rate over the 39-year period was 2.7%, while the average of 3.5% was skewed by double-digit default rates during the 1990-91 & 2001-02 crises.
• The average credit rating of the high yield universe has risen, with BB-rated bonds increasing from 32.7% in 1999 to 52.6% in 2024.
• Research indicates that buying high yield bonds at the all-time tightest spread of 241 basis points in June 2007 resulted in underperformance in the first year but outperformance of Treasurys & the Aggregate Index over 10- & 15-year periods.
• Bond returns are contractual, meaning investors receive the yield to maturity if the issuer pays interest & principal as promised, regardless of interim price declines caused by spread widening.
• Total bond returns consist of interest payments, price movement to par at maturity, & interest earned from reinvesting annual interest payments.