Five factors for long-term investors considering high yield
Shannon Ward
Fixed Income Portfolio Manager
David Bradin
Fixed Income Investment Director

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When building a long-term portfolio, getting it wrong can be costly: As returns compound, so can the regret of missing out on value. High-yield bonds are an example of a sector that some investors may overlook. We believe it warrants their attention.


Since COVID-19 disrupted markets in early 2020, high yield has been one of the best-performing fixed income sectors. In fact, high yield has significantly outpaced the Bloomberg U.S. Aggregate Index, U.S. corporate bonds, emerging markets bonds and securitized credit — and by a wide margin. Looking to history, we believe the high-yield market has the potential to remain strong and could serve many investors well as a permanent portfolio allocation. Here are five factors we believe they should consider when thinking about high yield. 


High yield has outpaced most fixed income sectors since 2020


A line chart showing returns for the Bloomberg U.S. High Yield 2% Issuer Capped Index, the Bloomberg U.S. ABS ex AAA Index, the Bloomberg U.S. Corporate Bond Index, the J.P. Morgan EMBI Global Diversified Index and the Bloomberg U.S. Aggregate Index from December 31, 2019 through December 31, 2024. The returns for the Bloomberg U.S. High Yield 2% Issuer Capped Index reached a low of -12.68% in March 2020 and finished at 22.84% in December 2024. The returns for the Bloomberg U.S. ABS ex AAA Index reached a low of -3.06% in March 2020 and finished at 15.37% in December 2024. The returns for the Bloomberg U.S. Corporate Bond Index reached a low of -12.52% in October 2022 and finished at 1.52% in December 2024. The returns for the J.P. Morgan EMBI Global Diversified Index reached a low of -21.39% in September 2022 and finished at 0.58% in December 2024. The returns for the Bloomberg U.S. Aggregate Index reached a low of -10.79% in October 2022 and finished at -1.62% in December 2024.

Source: Bloomberg. As of 12/31/24. Past results are not predictive of results in future periods.

1. High yield market timing can be a dangerous game


To be sure, current high-yield spreads (or the premium bondholders earn over Treasuries) are relatively tight. But in our view, investors who are waiting for spreads to widen may be missing the forest for the trees. If we segment the economic cycle into four periods, high-yield spreads look similar across early-, mid- and late-cycle. And within the fourth period, recessions, one extreme outlier — the 2007—2009 Global Financial Crisis (GFC) — accounts for most of the dramatic widening over the past 20 years. During the GFC, spreads on the Bloomberg U.S. High Yield 2% Issuer Capped Index widened to 1940 basis points (bps) on December 16, 2008 — almost 400% higher than their average of 488 bps since December, 2004. But other than that timeframe, spreads have exceeded 1000 bps only once in the past 20 years: during the COVID-19 pandemic, when they peaked at 1099 bps on March 3, 2023.


This makes timing the high-yield market a particularly dubious strategy. To be successful, market timers would likely need to make several accurate calls over many years in order to beat the high-yield sector’s long-term average return — something like flipping a coin multiple times and needing it to come up heads every time. Instead, we believe investors should be careful not to sacrifice the higher coupon rates and greater income that the sector may provide over the long term.


The same potential market timing mistake applies to portfolio construction. Many investors maintain a core fixed income allocation in an effort to achieve a degree of diversification from equities and to generate moderate income, but they may not include high yield as part of their fixed income strategy. Still, ignoring high yield entirely could limit their portfolio’s long-term return potential.


For example, consider the Bloomberg U.S. Aggregate Index (the Agg) as a proxy for an investor’s core fixed income allocation. Over the past 20 years, the Bloomberg U.S. High Yield 2% Issuer Capped Index has outpaced the Agg by 3.4% on an annualized basis. Looking at periods where high-yield spreads have been below their historical average, the sector has still outpaced the Agg by 1.5% on a forward 12-month basis.


Since June 2004, high yield has outpaced core fixed income – even when spreads were tight


A bar chart showing average annualized returns for the Bloomberg U.S. Aggregate Index and the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index from December 31, 2004 through December 31, 2024. The chart also shows the 12-month forward return for each index when spreads have been tighter than their historical average. Over the period, the average annualized return for the Bloomberg U.S. Aggregate Index was 3.0%, while the average annualized return for the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index was 6.4%. The difference between the two returns over the period was an annualized rate of 3.4%. The 12-month forward return when spreads were tighter than their historical average was 2.5% for the Bloomberg U.S. Aggregate Index and 4.0% for the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index. The difference between the two returns over the period was an annualized rate of 1.5%.

Source: Bloomberg Index Services Limited. As of 12/31/24.

We believe maintaining an allocation to high yield as a complement to a core bond position has the potential to improve fixed income investors’ returns. Consider a hypothetical portfolio that had an allocation to the American High-Income Trust (AHIFX) alongside our core offering the Bond Fund of America (ABNFX) over the past five years. Adding high yield to the portfolio’s core allocation would have boosted these returns with only a modest increase in correlation to equities.


Figures shown are past results and are not predictive of results in future periods. Current and future results may be lower or higher than those shown. Prices and returns will vary, so investors may lose money. Investing for short periods makes losses more likely. View mutual fund expense ratios and returns.

An allocation to AHIFX can potentially increase returns


A dot chart showing five-year returns and five-year correlation for the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index and the Bloomberg U.S. Aggregate Index. In addition, the chart shows returns and correlation for the American High-Income Trust (AHIFX) and the Bond Fund of America (ABNFX), as well as an 80%20%, 70%/30% and 60%/40% combination of the Bond Fund of America and the American High-Income Trust, respectively. As of December 31, 2024, the return for the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index was 4.20%, while its five-year correlation was 0.84. The return for the Bloomberg U.S. Aggregate Index was -0.33%, while its correlation was 0.56. The return for the Bond Fund of America was 0.53%, while its correlation was 0.57. The return for the American High-Income Trust was 5.53%, while its correlation was 0.82. The return for an 80%/20% combination of the Bond Fund of America and the American High-Income Trust was 1.53%, while its correlation was 0.62. The return for a 70%/30% combination of the Bond Fund of America and the American High-Income Trust was 2.03%, while its correlation was 0.65. The return for a 60%/40% combination of the Bond Fund of America and the American High-Income Trust was 2.53%, while its correlation was 0.67.

Source: Capital Group. As of 12/31/24. ABNFX represents the Bond Fund of America (F-2 share class), while AHIFX represents the American High Income Trust (F-2 share class). Past results are not predictive of results in future periods.

2. History provides indications of what has driven returns


Historically, the high-yield sector’s yield to worst (YTW) has been a strong indicator of forward returns. In this case, YTW is defined as the lowest possible yield that a bond portfolio can generate if the underlying issuers fulfill all their payment obligations. With that as a starting point, we can then look at the sector’s yield capture, or the percentage of a fixed income asset's starting yield to worst that is reflected in an investor's return over a specific period of time. Using the Bloomberg U.S. High Yield 2% Issuer Capped Index as a proxy for the high-yield market, over the past one, three, and five years, high-yield investors would have captured between 77.6% and 82.4% of the sector’s YTW at the time of their investment.


YTW can provide an indication of forward returns


A bar chart showing the one-, three-, and five-year yield capture for the Bloomberg U.S. High Yield 2% Issuer Capped Index as of December 31, 2024. The one-year yield capture was 77.6%, the three-year yield capture was 81.6% and the five-year yield capture was 82.4%.

Source: Bloomberg Index Services Limited. As of 12/31/24. Past results are not predictive of results in future periods.

Of course, returns can always deviate from their historical average, but with high yield’s current YTW at almost 7.5% (according to Bloomberg, as of 12/31/24), we believe the sector offers strong long-term return potential despite its current spreads.


3. S&P 500 Index constituent earnings growth: a complementary indicator


High yield’s economic sensitivity means that year-over-year earnings growth among high-yield issuers is typically correlated to earnings growth among the constituents of the broad equity market. Over the past 10 years, year-over-year earnings growth among the constituents of the S&P 500 Index and earnings growth among U.S. high-yield issuers have exhibited a similar pattern: When earnings growth among S&P 500 Index constituents has been positive, earnings growth among U.S. high-yield issuers has tended to be positive as well.


A distinct correlation among earnings


A line chart showing the relationship between year-over-year earnings growth among the constituents of the S&P 500 Index and earnings growth among U.S. high-yield issuers from 2014 through November 2024. Year-over-year earnings growth among the constituents of the S&P 500 Index ranges from a low of -10.3% in 2020 to a high of 47.9% in 2021and finishes at 9.5% in November 2024. Meanwhile, year-over-year earnings growth among U.S. high-yield issuers ranges from a low of -22.8% in 2020 to a high of 48.9% in 2021 and finishes at 1.2% in November 2024. While the correlation between the two is not 100%, the chart indicates that when earnings growth among the constituents of the S&P 500 Index is positive relative to the prior year, earnings growth among U.S. high-yield issuers tends to be positive as well. The chart also shows that according to Capital Group, earnings growth among the constituents of the S&P 500 Index is expected to increase by 14.8% in 2025, implying that earnings growth among U.S. high-yield issuers may potentially increase as well.

Source: FactSet. As of 11/30/24. U.S. high-yield issuer earnings growth based on Bank of America Merrill Lynch data. Past results are not predictive of results in future periods.

Capital Group economists project that earnings growth among the constituents of the S&P 500 Index will be positive through 2025, leading us to believe that earnings growth among U.S. high-yield issuers could also be strong if they follow this historical pattern. 


4. Credit quality: not last decade’s junk


In addition to the factors mentioned above, the average credit quality of the high-yield sector has increased significantly over the past 10 years, with more than 50% of the Bloomberg U.S. High Yield 2% Issuer Capped Index rated BB/Ba as of December 31, 2024. Meanwhile, the percentage of the index rated CCC or below has generally decreased over the same period. While this higher average credit quality may justify some of the spread tightening we’ve seen in the sector in recent years, we believe higher credit quality should lead to lower price volatility and default rates, thereby reducing an investor’s risk in owning high yield. 


Since 2014, high-yield credit quality has trended higher 


A line chart showing the percentage of the high-yield market that was rated BB/Ba from December 31, 2014 through December 31, 2024. From left to right, the line begins at 43.13% in December 2014. It reaches a similar point in July 2018 and peaks at 54.76% in July 2020. It finishes at 50.77% in December 2024.

Source: Bloomberg. As of 12/31/24. The high-yield sector is represented by the Bloomberg U.S. High Yield 2% Issuer Capped Index. Past results are not predictive of results in future periods.

5. An opportunity to rebalance


With equity markets currently at or near all-time highs, we believe many investors should reconsider their portfolio’s equity risk exposure. Those with a long-term income focus might consider rebalancing some of their risk exposure from equities to high yield. For example, investors might lower their allocation to dividend stocks and add to high yield as a means to potentially increase current income and decrease portfolio volatility. Over the past five years, for example, high-yield bond income has outpaced income from dividend stocks within the S&P 500 Index and the S&P 500 Dividend Aristocrats Index with lower average volatility. 


High yield’s average yield has exceeded that of dividend-paying stocks 


A dot chart showing the average five-year yield and the standard deviation of returns for the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index, the Bloomberg U.S. Corporate Bond Index, the S&P 500 Dividend Aristocrats Index and the S&P 500 Index as of 12/31/24. The average yields were as follows: the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index: 6.39%; the Bloomberg U.S. Corporate Bond Index: 5.33%; the S&P 500 Dividend Aristocrats Index: 2.87%; and the S&P 500 Index: 1.27%. The standard deviation of returns was as follows: the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index: 9.33%; the Bloomberg U.S. Corporate Bond Index: 9.04%; the S&P 500 Dividend Aristocrats Index: 18.05%; and the S&P 500 Index: 18.21%. Overall, the chart shows that the Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index had a higher average yield with a lower standard deviation of returns than the S&P 500 Dividend Aristocrats Index and the S&P 500 Index over the period described.

Source: Bloomberg. As of 12/31/24. *In investment terms, standard deviation measures the degree of variation of returns from the average (mean) return. Past results are not predictive of results in future periods.

A more nuanced approach to high yield


Investors often use high-yield spreads as an indicator of when to invest in the sector. Still, we believe historical analysis demonstrates that factors such as YTW, earnings growth among the constituents of the S&P 500 Index and average credit quality can help provide a more accurate view of potential forward high-yield returns. Although it’s natural for investors to be concerned with tight spreads, trying to market-time one’s allocation to high yield may be much more difficult and costly than one may expect. Against this backdrop, we encourage long-term investors to take a broader, more nuanced approach to the sector. Ultimately, high yield can potentially provide strong current income and returns over many market cycles — and most often with lower volatility than equities. 


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Published on February 7, 2025

Shannon Ward is a fixed income portfolio manager with 32 years of investment industry experience (as of 12/31/2024). She holds an MBA from the University of Southern California and a bachelor's degree in psychology from University of California, Santa Barbara.

David Bradin is a fixed income investment director. He has 19 years of industry experience (as of 12/31/2024). He holds an MBA from Wake Forest University and a bachelor's degree in mediated communications from North Carolina State University.

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