High-yield bonds are seeing renewed interest due to significantly higher yields, now ranging from 6% to 7% in Europe and the U.S., compared to pre-rate-hiking cycles. This makes carry returns a primary driver of performance, fundamentally altering the segment's return dynamics. Despite these attractive yields, risk premia remain comparatively tight, reflecting robust fundamentals and stable default expectations, though this also limits the buffer against unexpected shocks. Regional differences exist, with U.S. markets more influenced by interest rates and capital flows, while European markets are shaped by structural factors like issuer composition.
The European high-yield market, which had contracted from nearly €500 billion in 2022 to €355 billion by May 2025, has since expanded by about 15% to over €410 billion as of June 2026, with new issuance accelerating in 2025 and 2026. This growth is mirrored in the U.S. market, which has grown by an average of 8% over the past two years. Issuers are returning to the bond market to lock in attractive credit premia, driven by the rise in all-in yields to between 5% and 6%.
High-yield bonds currently offer a more balanced risk-return profile compared to loans, which have seen compressed spreads despite strong technical support. With a modest duration of around three years, high-yield bonds provide potential upside if rate expectations continue to moderate. The bar for further rate hikes is perceived to be higher, especially as inflation appears to have peaked, which could make duration increasingly supportive of returns. The average duration of the European high-yield market has increased by half a year from early-2025 lows, easing concerns about a potential 2027–2028 maturity wall.
The current environment is characterized as a late stage of the credit cycle, where carry is gaining importance, and sensitivity to negative surprises is increasing. While default rates remain moderate, vulnerability to macroeconomic surprises and idiosyncratic risks is rising. Scenario analysis suggests that even with a 200 basis point widening in the Euro high-yield spread over twelve months, a broadly flat total return could still be achieved. Careful issuer selection, diversification, and sector allocation are becoming increasingly critical to navigate the challenging landscape of higher financing costs and more moderate growth.
