High Yield: Attractive Income, Expanding Opportunities

High yield offers attractive income without requiring investors to move aggressively down the credit-quality spectrum, but growing dispersion demands selectivity.

• Robust U.S. growth, supported by consumer spending, fiscal support and AI investment, suggests that higher government bond yields mainly reflect stronger growth rather than a worsening inflation outlook.
• Healthy earnings are helping issuers manage leverage, maintain interest coverage and absorb higher borrowing costs, unlike during the rapid rate transition of 2022.
• Market quality has improved: BB issuers represent 62% of global high yield bonds and CCC exposure 7%; CCC exposure is also 7% in U.S. loans and 4% in European loans, according to data as of August 31 and June 30, 2026.
• Risks are concentrated in rate-sensitive housing, highly leveraged building-products companies, and European chemicals and automotive issuers facing weak industrial demand and lower-cost competition.
• AI infrastructure is creating financing opportunities in data centers, power generation and related assets, but execution risk, increased issuance, pressure on existing debt prices and regulatory constraints could increase volatility; European high yield has less direct AI exposure than the U.S. market.
• Bonds, particularly shorter-maturity issues, offer income with relatively limited duration risk, while loans remain attractive if rates stay high but have less price-appreciation potential because much of the market trades around or above par.

Takeaway: Investors should favor higher-quality issuers and exploit pricing gaps between market technicals and fundamentals rather than rely on broad high yield exposure, while monitoring AI-related issuance, concentration and sector-specific balance-sheet risks.