High-Yield Corporate Bonds Are Attractive Amid Low Default Risk In 2023: Oaktree Capital

High-yield bonds issued by American and European corporations are considered attractive assets since they offer above-average yields at cheap prices, according to Oaktree Capital Management's most recent credit market outlook.

The asset management firm specializing in alternative investment strategies stated that the risk of widespread corporate defaults in 2023 remains low, as issuer fundamentals are rather solid, and near-term maturities are modest following the wave of refinancing in 2020-21.

The high yield market – which is tracked by the iShares iBoxx $ High Yield Corporate Bond ETF HYG – "appears to be better positioned to weather an economic downturn than in the past," according to Oaktree. 

Yields continue to trade considerably above the ten-year average, with over 55% of HY corporates showing yields above 7% at the end of Q1, compared to less than 7% at the start of 2022. 
The global asset manager also cautioned that issuer selection remained critical, since risks are not insignificant in this asset class. Low-rated corporate issuers may struggle to roll over debt now that financial conditions have tightened and "reduced earnings due to inflation may have a negative impact on leverage ratios and result in credit rating downgrades," Oaktree analysts wrote in the note.

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What Yields Do High Yield Bonds Offer Today?

• The broad U.S. high-yield bond market screens an effective yield to maturity of 8.25%, as of Friday, April 21. 
• BB-rated high-yield corporate bonds in the United States had an effective yield of 6.62%.

B-rated high-yield corporate bonds in the United States had an effective yield of 8.58%.

CCC-rated high-yield corporate bonds in the United States had an effective yield of 14.67%.

How Have U.S. High Yield Bonds Performed in 2023?

• So far in 2023, high-yield corporate bonds in the United States have produced a total return of 4%.
• BB-rated high-yield bonds have delivered a total return of 3.7%, lagging behind.  
• B-rated high-yield bonds have delivered a total return of 4.2%. 
• CCC-rated high-yield bonds have outperformed the other buckets with a total return of 5.7% year to date, outperforming the other buckets. 

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