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Investment Strategies

Unlocking Potential in Active High Yield Bonds

Portfolio Manager David Forgash discusses the high yield bond markets today, and highlights the benefits of active management.

Text on screen: PIMCO

Text on screen: David Forgash, PORTFOLIO MANAGER, LEVERAGED FINANCE

Forgash: After double digit returns last year the high yield market continues to perform well on average with corporate balance sheets in a healthy position. High yield is situated well for low (but positive) growth, and inflation coming down toward target.

Text on screen: TITLE – High Yield credit metrics remain strong; The bar chart shows how leverage ratios have fallen post-pandemic from 2Q19 though 2Q24 as measured by JPMorgan. Starting at roughly 4.0x in 2Q19, leverage ratios saw an uptick in 1Q20 followed by rising ratios that reached their peak in 1Q21 at nearly 6.0X. Since then, leverage ratios have fallen back in line with their pre-pandemic levels and were at 4.0x in 2Q24.

Fundamentals are strong, credit metrics today look better than the long-term.

Overall leverage has come down substantially post-COVID, and companies’ ability to service their debt is stronger than pre-pandemic, despite the increase in interest rates over the last few years. High yield issuers have done a great job proactively refinancing near-term maturities.

Defaults remain low, and we think they stay at or below the long-term average of ~3% in the near term.

Chevron split screen – Text on left: Demand for high yield is strong with positive flows for active high yield strategies, B-roll on right: Trade floor

Demand for high yield is strong with positive flows in the asset class, particularly into active high yield strategies.

While technicals are supportive and fundamentals are resilient on average, there is growing dispersion between “haves” and “have nots”. This level of dispersion in the market is elevated from a historical perspective, and there is a tail to the market that's facing stress.

B-roll on right: wireline, media and cable sectors

Pockets of stress are forming within the high yield market, particularly within the wireline, media, and cable sectors.

Actively managing exposure in this elevated rate environment offers investors the opportunity to lock in compelling yields.

Text on screen: TITLE – High Yield credit is attractive as a source of income versus equity dividend yields; Image on screen: A line chart compares the dividend yields for U.S. high yield (bb rated) bonds, European high yield (bb rated) bonds, U.S. equities and European equities from 2008 though 2023. It shows that U.S high yield (bb rated) bonds have offered higher yields than both U.S. and European equities over the 15-year period with the exceptions of 2020 when U.S high yield (bb rated) bonds were roughly on par with European equities. In 2023, U.S. high yield (bb rated) bonds, and European high yield (bb rated) bonds offered yields above 5%, while U.S. and European equities fell below 5% with U.S equities yielding about 2.5%.

High yield may be able to deliver equity-like returns, but importantly with yields at these levels, high yield may offer investors ability to embed more downside protection into their portfolios relative to equity at current valuations.

While spreads are on the tighter end, total yields remain compelling, even on a default-adjusted basis, as “all-in” yields provide a higher degree of cushion to absorb potential spread widening.

Through active security selection, managers can potentially avoid bonds with impairment risk, which is particularly important during periods of slowing economic growth when dispersion amongst issuers is high, like we see today.

With our time-tested investment process and forward-looking approach to credit analysis, PIMCO aims to leverage the structural advantages of active management in the high yield bond market for the benefit of our clients.

Text on screen: For more insights and information visit pimco.com

Text on screen: PIMCO

Disclosure


All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in distressed companies (both debt and equity) is speculative and may be subject to greater levels of credit, issuer and liquidity risks, and the repayment of default obligations contains significant uncertainties; such companies may be engaged in restructurings or bankruptcy proceedings. Diversification does not ensure against loss. Equities may decline in value due to both real and perceived general market, economic and industry conditions. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.

This material contains the current opinions of the manager such opinions are subject to change without notice.  This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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