Exploring Opportunities in Global High Yield

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We have previously noted how the U.S. high yield market exhibited extraordinary resilience in 2023, with the ICE BofA U.S. High Yield Constrained Index returning 13.5% for the year. In 2023, the market recovery came as the U.S. economy avoided a recession that had been widely expected in some corners of the market. The resilience in fundamentals and valuations also reflected the overall inflation environment, associated high nominal growth rates, and disciplined balance-sheet management on the part of many high yield issuers.

In our view, these factors could also provide for enduring strength in public credit markets for many years to come. And for investors considering a broader opportunity set, many of the same themes hold true for global high yield. (As a reminder, global high yield encompasses high yield bonds issued in both the United States and other countries.) The representative ICE BofA Global High Yield index had a market capitalization of $2.05 trillion as of December 31, 2023, as compared to $1.24 trillion for its U.S. counterpart mentioned above.

We believe there are several potential benefits to investing in global high yield as opposed to solely U.S. high yield, which we will explore here.

1. The Opportunity for Spread Pickup Versus U.S. High Yield

Look at Figure 1, which tracks the spread an investor receives for embracing a global high yield approach over a U.S.-centric one. The option-adjusted spread, as of December 31, 2023, was 385 basis points (bps) for the global high yield index and 339 bps for the U.S. high yield index. We believe the spread differential in the two indexes highlights the relative value that remains in global high yield.

Figure 1. Wider Spreads on Global High Yield

Option-adjusted spread on the ICE BofA U.S. High Yield Constrained Index and the ICE BofA Global High Yield Index, December 31, 2011–December 31, 2023

Source: ICE Data Indices, LLC. Based on ICE BofA Indices: U.S. High Yield Constrained Index; Global High Yield Index. Data as of December 31, 2023. One basis point equals one one-hundredth of a percentage point.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only. Due to market volatility, the market may not perform in a similar manner in the future. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. The index data provided are not representative of any Lord Abbett product. See Past Performance of Selected Indexes, below.

2. Today’s Higher Yields Offer the Potential for Higher Returns

With yields on the global high yield index near multi-year highs, investors have an attractive entry point into the asset class, in our view. As we have previously noted, the main component of returns in global high yield over time is simply income generated from coupon payments. Entering the market at a higher starting yield can help position an investor for higher potential returns in ensuing years, as Figure 2 shows.

Figure 2. Elevated Yields May Present an Attractive Entry Point

U.S. global high yield index yield-to-worst, December 31, 2011–December 31, 2023

Source: ICE Data Indices, LLC. Data as of December 31, 2023. YTW = Yield to worst. Yields represented by the ICE BofA Global High Yield Index. * Return data calculated from index inception in December 1997. Past performance is not a reliable indicator or guarantee of future results. The historical data shown in the chart above are for illustrative purposes only. Due to market volatility, the market may not perform in a similar manner in the future. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. The index data provided are not representative of any Lord Abbett product. See Past Performance of Selected Indexes, below.

3. Comparable Duration to U.S. High Yield

Another attractive feature of global high yield: While spreads are wider than in U.S. high yield, duration—a measure of interest-rate sensitivity—is roughly equal to that of the U.S. index, as shown in Figure 3. A slowdown in bond issuance following record highs set in in 2020 and 2021, paired with a large amount of COVID-era “fallen angels” making their way back to investment grade, are two reasons for the shorter-duration profile seen in global and U.S. high yield markets.

Figure 3. Global High Yield Index Has Similar Duration Profile as U.S. Counterpart

Effective duration for indicated indexes, December 31, 2019–December 31, 2023

Source: ICE Data Indices, LLC. Based on ICE BofA Indices: U.S. High Yield Constrained Index; Global High Yield Index. Data as of December 31, 2023.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only. Due to market volatility, the market may not perform in a similar manner in the future. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. The index data provided are not representative of any Lord Abbett product. See Past Performance of Selected Indexes, below.

4. Enhanced Opportunities for Active Security Selection

Global high yield markets have rarely performed in line with each other, leading to divergence in performance between regional high yield sectors. (See Figure 4.)

Figure 4. Dispersion in Annual Returns Across Global High Yield Markets

Annual returns for indicated indexes and subindexes, 2010–2023

Source: Bloomberg. Data as of December 31, 2023. Based on ICE BofA Indices: U.S. High Yield Constrained Index (US HY); Global High Yield Index (GHY); Euro Global High Yield Index (EU HY); and the ICE BofA High Yield Emerging Markets Corporate Plus Index (EM HY).
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only. Due to market volatility, the market may not perform in a similar manner in the future. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. The index data provided are not representative of any Lord Abbett product. See Past Performance of Selected Indexes, below.

We believe these conditions provide active managers an opportunity to achieve alpha through active geographic, credit quality, and sector rotation. And remember, the larger size of the global high yield market mentioned earlier provides a longer list of candidates to choose from.

5. Supportive Default, Credit-Quality Trends

Yes, default rates climbed in 2023 as economic growth slowed in key geographies. But we believe a turn may be in the making with central banks around the world flipping to an easing bias, a trend generally supportive for leveraged issuers. (See Figure 5.) Note that emerging-markets defaults in 2022 were driven by developments in China, Russia, and Ukraine—a trend that moderated significantly in 2023.

Figure 5. Default Trends Remain Favorable

Default rates by region, November 30, 2011–November 30, 2023

Source: ICE Data Indices, LLC. LTM = Last 12 months. Default rates based on ICE BofA Euro Global High Yield Index, ICE BofA U.S. High Yield Index, ICE BofA High Yield Emerging Markets Corporate Plus Index, and calculated on number of issuers. For illustrative purposes only. Due to market volatility, the market may not perform in a similar manner in the future. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. The index data provided are not representative of any Lord Abbett product. Most recent data available. See Past Performance of Selected Indexes, below.

Meanwhile, the overall credit quality of the global high yield index remains near all-time highs, with some 57% of par value outstanding rated ‘BB’—a significantly higher percentage than the U.S. high yield index (49%). (Data from Bloomberg, as of December 31, 2023.) The average rating on issues in each index is ‘B+.’

A Final Word

We believe the factors mentioned above reinforce the case for a strategic allocation to global high yield based on a solid fundamental picture and attractive relative value. History has shown that income, not price, drives the majority of returns, year in and year out, and we believe the same for the remainder of the near term. However, to achieve those returns, we believe the unbiased, opportunistic approach that active management can bring to the global high yield asset class, across the full spectrum of credit quality, is best suited for today’s market environment.

Past Performance of Selected Indexes:

NOTE: Calendar-year return data for indicated indexes. Returns for ICE BofA Global High Yield Index, ICE BofA Euro High Yield Index, and ICE BofA High Yield Index Emerging Markets Corporate Plus Index calculated in US dollars. Data as of December 31, 2023. Past performance is no indication or guarantee of future results. Source: Bloomberg.

IE00BD89JD53

Global High Yield Fund

Leveraging the Firm’s long history in credit analysis, the Fund is designed to deliver current income and the opportunity for capital appreciation by investing primarily in high yield corporate bonds globally.

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About the Contributors

Thomas A. Baker

Product Specialist

Sean Carroll, CFA

Product Specialist

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Glossary & Index Definitions

A basis point is one one-hundredth of a percentage point.

Coupon represents the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates.

Fallen angel is a term that describes an investment-grade company that has had its debt subsequently downgraded to speculative grade. Rising star refers to a company whose bond rating has been increased by a credit rating agency due to an improvement in the credit quality of the issuer.

The Federal Reserve (Fed) is the central bank of the United States. The federal funds (fed funds) rate is the target interest rate set by the Fed at which commercial banks borrow and lend their excess reserves to each other overnight.

Nominal gross domestic product (GDP) and real GDP both quantify the total value of all goods produced in a country in a year. However, real GDP is adjusted for inflation, while nominal GDP is not.

Spread is the percentage difference in current yields of various classes of fixed-income securities versus Treasury bonds or another benchmark bond measure. A bond spread is often expressed as a difference in percentage points or basis points (which equal one-one hundredth of a percentage point). The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option. Typically, an analyst uses the Treasury securities yield for the risk-free rate.

Yield is the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment's cost, current market value, or face value. Yield-to-worst refers to the lesser of a bond’s (a) yield-to-maturity or (b) the lowest yield-to-call calculated on each scheduled call date.

ICE BofA U.S. High Yield Constrained Index is a rules-based index consisting of U.S. dollar-denominated, high yield corporate bonds for sale in the U.S. The index is designed to provide a broad representation of the U.S. dollar-denominated, high yield corporate bond market. The index is a modified market value-weighted index with a cap on each issuer of 2%.

The ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA Emerging Markets Corporate Plus Index, which includes only securities rated BB1 or lower. The ICE BofA Emerging Markets Corporate Plus Index tracks the performance of US dollar (USD) and Euro denominated emerging markets non-sovereign debt publicly issued within the major domestic and Eurobond markets.

The ICE BofA Euro High Yield Index tracks the performance of Euro denominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody's, S&P, and Fitch). Qualifying securities must have at least one year remaining term to maturity, a fixed coupon schedule, and a minimum amount outstanding of Euro 100 million.

The ICE BofA Global High Yield Index tracks the performance of below investment grade corporate debt of issuers domiciled in countries having an investment grade foreign currency long-term debt rating (based on an average of Moody's, S&P and Fitch). The Index is weighted by outstanding issuance, but constrained such that the percentage of any one issuer may not represent more than 2% of the Index.

ICE BofA Index Information:

Source: ICE Data Indices, LLC (“ICE”), used with permission. ICE PERMITS USE OF THE ICE BofA INDICES AND RELATED DATA ON AN “AS IS” BASIS, MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE BofA INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THE USE OF THE FOREGOING, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND LORD ABBETT, OR ANY OF ITS PRODUCTS OR SERVICES.

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