Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Register

5 November 2026

Home / 213

Watch the low returns on 'high yield' debt

It is boom time once again for global ‘high yield’ debt. It’s great for borrowers wanting cheap debt with few conditions but bad for long-term investors. Both investment grade and high yield debt carry more leverage than 10 years ago but interest servicing costs are lower. In effect, lower interest rates have allowed corporates to borrow more without having to pay more in interest.

The first graph from Bloomberg on US high yield shows the breakdown of US high yield bonds into rating categories. Compared to a decade ago, the higher quality BB’s make up a greater portion of the index, with B’s much less than 20 years ago, and CCC’s shrinking since the days of the GFC. That’s a good thing, though it needs to be considered alongside two other factors that aren’t so positive.

The bad news for high yield investors is that covenant quality is worse than it has ever been. The graph below tracks the proportion of US and European sub-investment grade loans that have minimal or no covenant protection. Asia isn’t faring any better, covenant-light bonds are at 61% of issuance in Singapore and 72% in Hong Kong. Fewer covenants mean that sick companies are allowed to operate unchecked for longer. A lack of covenants increases the proportion of debt that suffers monetary defaults and reduces the recovery rate.

The last key characteristic to note is that spreads over base rates are near the lowest in the last 10 years. US High Yield bond spreads are shown below, but the story for European debt and leveraged loans is the same. There’s been a wave of loans being repriced in the US and Europe this year; situations where borrowers reduce the spread they pay, usually without providing any offsetting risk reduction. Borrowers clearly have the whip hand over lenders.

Spreads are now at the level where the B and CCC rated segments are barely positive if historical average losses are subtracted. Not surprisingly, many are saying that now is the time to be a contrarian and sell high yield. Edward Altman sees high yield conditions as bad as 2007 and Howard Marks similarly warned about conditions in his latest memo. The initial yields on offer may look comparatively high, but that’s no guarantee of high returns in coming years.

 

Jonathan Rochford is Portfolio Manager at Narrow Road Capital. This article has been prepared for educational purposes and is not a substitute for tailored financial advice. Narrow Road Capital advises on and invests in a wide range of securities.

 

  •   3 August 2017
  •      
  •   

 

Leave a Comment:
Firstlinks is sponsored by:
banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Will investors be better or worse off under new housing tax changes?

Housing tax reforms have sparked warnings of market turmoil and promises of greater fairness. But after modelling nearly two decades of property data, the results suggest winners and losers may not be who many investors expect.

Latest Updates

Superannuation

Superannuation’s structural failings

Politicians are fighting over access to super, but they may be arguing about the wrong thing. The system’s three fundamental flaws have been hiding in plain sight for decades, costing Australians far more than they realise.

Planning

The great wealth transfer myth

Why do some families preserve wealth for generations while others struggle to? As the great wealth transfer unfolds, the determining factor is often not the structure of the estate, but the preparation of those who will inherit it.

Investment strategies

What comes after bank hybrids?

For years, bank hybrids have been a cornerstone of portfolio income. With tens of billions of dollars now disappearing from the market, investors face a critical question: what comes next, and are the obvious replacements enough?

Investment insights from the US

What happens when knowledge becomes a commodity? The latest themes emerging from the US tech sector suggest AI could reshape company moats, disrupt incumbents and create winners and losers in unexpected places.

Investing

Can Berkshire thrive without Buffett?

Warren Buffett's departure marks the end of an era. But the more important question for investors is whether Berkshire's culture, discipline and capital allocation framework can survive without the man who built them.

Retirement

The Bengen 4% Rule: Lost in translation

For years, retirees have been told to focus on withdrawal rates. But the real question is far simpler: how many dollars can you safely spend? The answer may be very different from what conventional retirement wisdom suggests.

Interest rates

Super low interest rates came with side effects

For more than a decade, investors lived through an era of near-zero interest rates. With bond yields now surging, it's worth asking whether cheap money solved economic problems, or introduced a much larger set of risks.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

Site Map

About Firstlinks

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.