High yield: Historically attractive starting yield levels

High yield credit offers compelling income opportunities, with starting yields in the 7–8% range historically associated with strong forward returns. Strong fundamentals, including low default expectations and solid credit metrics, provide resilience against the modest spread widening expected in 2025. Elevated issuance and a higher-quality index composition further support high yield’s ability to balance risk and reward in a dynamic market environment.

High yield credit enters 2025 with a compelling case for investors seeking attractive income potential. Starting yields in the 7–8% range offer a robust foundation, supported by historical data showing consistently attractive 12-month forward returns at these levels—underscoring high yield’s ability to deliver meaningful total returns even as the market faces evolving technical dynamics.

High yield fundamentals remain solid, providing a strong anchor for the asset class. Leverage has risen slightly to 4x, while interest coverage has softened to 4.7x. Despite these shifts, both metrics remain comfortably within historical norms and reflect the underlying strength of issuers. Low default expectations, supported by above-average credit ratios and improved lending conditions, further enhance the sector’s resilience. U.S. economic growth, though moderating, continues to offer tailwinds for corporate stability.

From a technical perspective, issuance is projected to climb to approximately $300 billion in 2025, driven by refinancing activity alongside a growing focus on mergers, acquisitions, and shareholder-friendly initiatives. While increased supply could lead to modest spread widening, the index’s higher-quality composition—over 50% BB-rated—and shorter duration, help mitigate these risks.

With its combination of elevated starting yields, robust fundamentals, and historical outperformance from similar levels, high yield credit is well-positioned to offer attractive total returns. Investors seeking income with balanced risk may find this sector particularly appealing in the year ahead.

Read more about additional themes impacting fixed income markets and portfolios in the quarter ahead in our 1Q Fixed Income Perspectives

Contact our sales team: Stef Bogaars (bogaars.stef@principal.com) or Britt Laeven (laeven.britt@principal.com)

Investing involves risk, including possible loss of Principal. Past Performance does not guarantee future return. Fixed‐income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Non-investment grade securities offer a potentially higher yield but carry a greater degree of risk. Potential investors should be aware that fixed Investments carry credit risks, default risk, liquidity risks, currency risks, operational risks, legal risks, counterparty risk and valuation risks.

The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice.