High Yield Bonds Off Last Year’s Highs but Remain Attractive Asset for Investors: A Conversation with Jordan Lopez and Nick Burns of Payden & Rygel

Question: The performance in most sectors of the bond market was very strong at the end of 2023, despite a lot of volatility. What do you see for 2024?

Jordan Lopez: Much of the 2024 performance was pulled forward in November and December, but all else equal, we expect 2024 to be another good year. There are a lot of macro tailwinds that should support all risk assets, but particularly high-yield bonds. High yield bonds benefit from growth in general, and as inflation comes down – which we believe it will – rates should rally to the benefit of high yield bonds. In some ways, it's the best of all worlds. Our base case now is for a soft landing. We believe unemployment will remain low, growth will remain positive, albeit maybe not as positive as it was last year, and inflation will continue to trend down.

When we look at the makeup of the high yield market specifically, it's still very healthy. The valuations aren't quite as attractive as they were a few months ago, but with all-in yields at 8%, that's competitive with equities long-term, and historically, high yield has much better downside protection than broad equities do. With that as a backdrop, we do expect money to keep flowing into the asset class and we expect the companies within high yield to continue to perform.

Nick Burns: One of the themes everybody talks about is the macro-economic environment, and that's obviously very important, but the micro economic perspective is important too. We've seen persistently positive results in terms of issuers continuing to maintain balanced balance sheets and balanced credit metrics, with overall fundamentals that suggest that they are prepared to manage through a recession. I don't think a recession is anybody's base case at this point but you still have a lot of comfort with the margin of safety that you're getting from the issuers in our universe.