War in the Middle East, which has led to the closure of the Strait of Hormuz; rising geopolitical tensions in general; and fears of rising rates and inflation have all contributed to a more uncertain outlook.
However, this all appears to have been brushed under the carpet, with most major markets producing double-digit returns in the first six months of the year.
In that environment why would an investor look toward bonds, and particularly high yield bonds, where the discussion is principally around credit spreads being tight?
There are also refinancing pressures mounting as companies face significantly higher borrowing costs than those available during the low-rate era.
All-in yields on high yield bonds are currently around the 6-7% mark – clearly a more attractive environment (in terms of yield and opportunities) than what we saw in the decade or so following the global financial crisis – but detractors would be quick to tell you that the spread is not particularly attractive.
Figures from the ICE Bank of America European High Yield Index sit at just 277 basis points (bps). Figures from the ICE Bank of America Global High Yield Index typically place spreads for high yield at around 550bps, although these are elevated due to periods of stark volatility – such as the global financial crisis when spreads hit 2,000bps.
It is no longer a 'rising tide lifts all boats' environment – active managers must not only be very selective in terms of opportunities but also avoid issuers whose financial resilience may be tested as market conditions evolve.
There are some factors worth mentioning which indicate the stability of the high yield bond market. Globally, the high yield 'maturity wall' does not look concerning, with most maturities pushed out until 2028 and beyond.
Secondly, the construction of the high yield market has moved towards higher-quality issuers. For example, the highest-quality high yield bonds (BB) accounted for 62% of the market at the start of 2026, compared to a third at the turn of the century.
I'd also argue that while global growth is set to slow in 2026 due to geopolitical tensions – it is far from a catastrophe. The International Monetary Fund's latest update says the world economy has dodged a sharper downturn, with demand for AI and other technologies helping to offset a sharp drop in energy supplies as a result of the war. Growth should rebound to 3.4% in 2027.
Importantly, defaults have not picked up as yet – with latest figures in the 3-4% range for Europe and the US at 4-5% on average and well below the 8-10% seen in recessionary peaks. It should be noted that the improvement in credit quality will have played a role in this.
There are opportunities for active managers
It appears to be a market that is stable, not spectacular, but there are opportunities for good active managers. The first point I would want to make is that while spreads are tight across the market, much of that is due to it being higher quality. For example, BB spreads are around 160bps, while CCCs are around 975bps.
Cathal Dowling, product director on the Invesco fixed income team and part of the Invesco Bond Income Plus investment trust, says the trust remains defensively positioned, citing fewer opportunities appearing following the outbreak of war in the Middle East compared with during the period of volatility caused by Liberation Day 12 months earlier.
He says the team has found some opportunities – highlighting software companies, due to the unknowns around the impact of AI on their models.
Tight markets have meant an increased focus on good credits from the bottom up. Physical assets have been a focus, such as pub business Punch Taverns, which also has a resilient income and can pass on costs to consumers.
Aegon High Yield Bond fund co-manager Tom Hanson says he has been underweight chemicals and has maximised his exposure to energy (20%) on the back of the Middle East uncertainty.
He has also been overweight the likes of Europe, UK (sterling) and emerging market high yield – while being underweight the US (15% vs. 60% for the index).
He said: "For sterling you can almost go back to the original Brexit vote – ever since then it has traded at a spread premium and there has also been less of a dedicated buyer base for sterling high yield. That means sterling bonds trade cheap – and there is a lot of opportunity there."
Artemis Global High Yield Opportunities co-manager Jack Holmes said while high yield bonds have lagged global equities in the first half of the year, they do historically demonstrate far lower levels of drawdown when equity markets weaken.
Holmes was particularly keen to highlight the performance of short-dated high yield bond funds (the fund currently has 30% in bonds with a 0-3 years maturity). He pointed to the dot-com bubble in 2000-2002 as an example of this, where despite defaults reaching their highest level in history and spreads doubling (back in 2000, bonds issued by telecoms, media and technology companies accounted for around a third of the market), much of the damage was offset by the income high-yield bonds paid in that period.
He said: "Over the dark days of 2000-02, short-dated high yield bonds – a contractual claim on near-term cashflows – produced a 10% return while global equities fell by more than 40%.
"While high yield has generally delivered lower levels of return than equities through periods of strong equity-market performance (such as 2003-06), it has seen far lower levels of drawdown in periods of equity market weakness."
High yield bonds have always been an area where I believe active management excels. Spreads being tight is not unusual and there still remain opportunities for those with the skill to find them.
All-in yields remain attractive and strong stockpickers can find extra value on top of that to offer an attractive proposition to investors. Investors looking for further options in high yield bonds might consider the Man High Yield Opportunities fund or the Jupiter Monthly Income Bond fund, which has around 50% in high yield.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services. The views expressed above should not be taken as investment advice.