Navigating the 'riskiest portion' of the US high yield market

Low probability of US 2020 recession

Overweighting the riskiest portion of the US high yield market in a late-cycle environment may appear counterintuitive on the surface as these credits would be among the most affected by an economic downturn.

However, we believe an overweight allocation to weak B-rated and CCC-rated credits is warranted based on global investors' ongoing search for yield, overvalued BB-rated issues, a constructive view of the global economic expansion, and credit spreads that imply a notably higher default rate than we expect. With about $11.75trn in negative-yielding debt globally (down from a peak of nearly $17trn in 2019), investors' need for yield remains palpable. The scarcity of yield is also indicated by an increasing number of non-US investors who are concerned that hedging costs may eat into poten...