The outlook for U.S. high yield fixed income may be more constructive than investors realize.
High yield is well-known for being riskier than other segments in the fixed income market; however, strong corporate fundamentals have strengthened the integrity of the asset class.
Currently, U.S. high yield bonds can offer higher income generation potential and a meaningful cushion against potential spread widening, according to BondBloxx. Meanwhile, U.S. high yield bonds have lower expected volatility than equities.
While leverage and interest coverage measures began to soften during the second half of 2023, high yield corporate balance sheets remain generally well-positioned, according to BlondBloxx. Additionally, average credit quality remains near all-time highs. The stronger fundamental starting point for U.S. high yield remains a differentiator in this economic cycle.
Investing in U.S. High Yield Bonds: Where to Start
With so many products now available to investors, investors can find exposure that perfectly aligns with their needs. For example, investors concerned about weakening U.S. economic conditions may want to refine high yield exposure. These investors can find opportunities that exhibit the most balance sheet strength and lowest historical default risk.
Therefore, for investors more bearish on the overall state of the fixed income market, the BondBloxx BB-Rated USD High Yield Corporate Bond ETF (XBB ) may be an ideal fit.
XBB comprises bonds rated at the higher end of the junk spectrum. This makes the fund a good fit for investors concerned about corporate credit downgrades and the possibility of increased defaults.
On the other hand, investors who are more bullish on the overall state of the economy and believe the risk of recession in 2024 is overblown may consider going in a different direction.
The BondBloxx B Rated USD High Yield Corporate Bond ETF (XB ) and the BondBloxx CCC-Rated USD High Yield Corporate Bond ETF (XCCC ) may be a better fit in this case, as the funds capture attractive income generation potential which provides cushion for widening spreads and higher expected defaults.
XCCC is one of three ratings-specific high-yield bond ETFs offered by BondBloxx. Meanwhile, XB seeks to invest in bonds rated B1 through B3.
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