Is high yield 'priced to perfection?' Is high yield 'priced to perfection?' http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\high-yield.jpg December 11 2024 December 11 2024

Is high yield 'priced to perfection?'

Three things to watch in 2025
Published December 11 2024
My Content

Economy With solid progress on inflation, the Fed began an easing cycle in 2024. However, January will usher in a new administration and policies contemplated under Trump 2.0 may not be bondholder friendly. While the market has mostly shrugged off concerns to date, President-elect Trump’s policies may lead to greater deficit spending and increased borrowing. This could lead the Fed to slow the pace of rate cuts if inflation proves to be sticky.

Policy On the regulatory front, we expect that the Trump administration will be more open to approve mergers and acquisition activity. High yield issuers are often the target of M&A, and strategic purchases of high yield companies by investment grade buyers may lead to price appreciation. Additionally, if animal spirits run rampant, we could see the return of leveraged buyout activity to the high yield market. While the new issue market in US high yield bonds has been dominated by refinancings the last several years, a rise in M&A activity, LBOs, or loan-to-bond transactions, should lead to more net new issue volume in 2025. Prudent credit underwriting will be important to prevent higher default activity in coming years. For 2025, we continue to expect a lower than average high-yield default activity given the low percentage of distressed securities which is currently around 2.5% of the market.

Valuations We believe the high yield market is currently "priced for perfection" making security selection paramount. Spreads in the high yield market are approaching levels not seen since before the GFC. The spread to Treasuries (as measured by the Credit Suisse High Yield II benchmark) was 301 basis points at November month-end versus a long-term median of 489 basis points. Spreads have only been tighter in 1% of history! Spreads are also highly compressed, with the dispersion between the 75th and 25th percentiles of OAS at 25-year tights. While spreads may remain at these current tight valuations for long periods, investors need to be aware of downside risk potential. Any change in economic outlook, geopolitical risks, or earnings that changes the market’s appetite for risk assets may cause spreads to widen. 

Tags 2025 Outlook . Fixed Income . Active Management .
EXPLORE
EXPLORE
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.

High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risk and may be more volatile than investment-grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.

The spread is the difference between the yield of a security versus the yield of a United States Treasury security with a comparable average life.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. 

This is a marketing communication. The views and opinions contained herein are as of the date indicated above, are those of author(s) noted above, and may not necessarily represent views expressed or reflected in other communications, strategies or products. These views are as of the date indicated above and are subject to change based on market conditions and other factors. The information herein is believed to be reliable, but Federated Hermes and its subsidiaries do not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. 

This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, related financial instruments or advisory services. Figures, unless otherwise indicated, are sourced from Federated Hermes. Federated Hermes has attempted to ensure the accuracy of the data it is reporting, however, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions. 

Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on this document. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. 

United Kingdom: For Professional investors only. Distributed in the UK by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is also a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).

European Union: For Professional investors only. Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59. 

Australia: This document is for Wholesale Investors only. Distributed by Federated Investors Australia Services Ltd. ACN 161 230 637 (FIAS). HIML does not hold an Australian financial services licence (AFS licence) under the Corporations Act 2001 (Cth) ("Corporations Act"). HIML operates under the relevant class order relief from the Australian Securities and Investments Commission (ASIC) while FIAS holds an AFS licence (Licence Number - 433831).

Japan: This document is for Professional Investors only. Distributed in Japan by Federated Hermes Japan Ltd which is registered as a Financial Instruments Business Operator in Japan (Registration Number: Director General of the Kanto Local Finance Bureau (Kinsho) No. 3327), and conducting the Investment Advisory and Agency Business as defined in Article 28 (3) of the Financial Instruments and Exchange Act (“FIEA”). 

Singapore: This document is for Accredited and Institutional Investors only. Distributed in Singapore by Hermes GPE (Singapore) Pte. Ltd (“HGPE Singapore”). HGPE Singapore is regulated by the Monetary Authority of Singapore. 

United States: This information is being provided by Federated Hermes, Inc., Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, and Federated Investment Management Company, at address 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, Federated Global Investment Management Corp. at address 101 Park Avenue, Suite 4100, New York, New York 10178-0002, and MDT Advisers at address 125 High Street Oliver Street Tower, 21st Floor Boston, Massachusetts 02110.

Issued and approved by Federated Investment Management Company

3654352907