High-yield bond investing in 2025: the year of the coupon
As 2025 gets underway, we believe high-yield fixed income remains an attractive asset class for investors because of its high income potential amid a supportive environment for credit fundamentals. On the whole, corporate earnings for high-yield companies are still robust across the market. We also do not see significant signs of a broader slowdown in that positive trajectory for a wide variety of issuers in the market. That said, the tight credit spreads in high-yield bond markets suggest the need for greater caution and a more active approach.
The European advantage
We think this year may bring greater regional divergence across markets, which active investors can seek to exploit. In our view, European high-yield bonds in particular offer attractive relative value. When we combine robust corporate fundamentals with the higher-quality composition of the local market, we do not see a full-scale default cycle on the horizon. Instead, we believe default rates are likely to remain low, at 2% – 3% over the next 12 months. From a valuation perspective, we acknowledge that spread levels in European high-yield bond markets are below historical averages — even if somewhat wider than US levels — and therefore imply less room for tightening from here. There is also the risk of sudden spread widening, particularly in more vulnerable market segments.
Taking a more holistic view, however, we believe that European high yield scores well in terms of yield metrics. Investors are still rewarded with a handsome coupon — an important metric given that over the past 20 years, income has tended to provide around 90% of the returns achieved by the asset class. 1 At the same time, we think investors need to reposition for potentially greater dispersion between sectors and issuers, particularly in the context of a weakening European economy and the threat that US President Donald Trump’s planned tariffs could pose.
