- The US high yield market has remained steady despite rising tensions and volatility
- Increasing bifurcation across sectors and issuers means credit investors must be selective
- With resilient fundamentals and below-average default rates we believe there are attractive investment opportunities across US high yield
By Jack Stephenson, US Fixed Income Investment Specialist
The last few months have not been straightforward for fixed income markets. As oil prices surged amid the Middle East conflict and inflation expectations rose, markets repriced the potential path of monetary policy.
Even so, the direct impact on US high yield returns has been relatively limited, with a maximum peak-to-trough drawdown year-to-date of -2.2% at the index level, which was recovered in just 11 days.1
This compares favourably to higher quality fixed income and equity market equivalents, as well as historical high yield drawdowns.
There has been little change to the prevailing narrative that high yield provides attractive income with historically tight spreads, which we believe is at least partially justified by structural improvements in quality and security.
Spreads continue to be driven more by rates volatility than the high yield market’s supply and demand dynamics. They widened modestly towards the end of March but peaked at around 350 basis points – still some 100bp lower than 2025’s Liberation Day peak – before tightening back to 270bp in August.2
This swift recovery reinforces the fact that demand for high yield remains strong, dominated by institutional investors and from larger, multi-asset total return funds.
We see this reflected in new issues that are typically oversubscribed with investors not always able to buy as much as they would like, contributing to a technical picture that still feels quite positive – particularly when yields move higher.
Meanwhile, artificial intelligence continues to impact the high yield market both as a driver of new supply and a disruptive force.
Like its effect on the overall economy, AI is exacerbating the unevenness that we see across sectors and issuers in the high yield market, meaning that investors must be selective to manage risks and seek out potential opportunities.
Diverging trends
Recent economic data continues to obfuscate the overall macro landscape somewhat. Solid GDP growth, higher inflation expectations from oil prices, and mixed labour market data makes it hard to pinpoint a singular narrative for the future of monetary policy, all amidst a changed Federal Reserve leadership.
That said, we are still expecting a strong economic environment driven by the robust capex cycle surrounding the AI and data centre ecosystem, which should be supportive of the high yield market and credit more broadly.
There is certainly fragility to the economic landscape, with significant emphasis on how the consumer fares from here. The higher-income consumer accounts for a significant portion of discretionary spend, buffeted by asset values in housing and the stock market, so benefits from stronger financial markets.
The lower-income leg of this so-called K-shaped economy has recently shown some improving data points, but industries more reliant on discretionary spend from this cohort may continue to feel pressure – particularly if second-round inflation effects from the Middle East conflict emerge.
The credit landscape similarly feels a little disjointed, albeit resilient overall, necessitating a selective approach. The conflict has impacted sectors such as energy – the main beneficiary from higher oil prices – but negatively affected industries that are more sensitive to raw commodity or fuel prices such as airlines, basic chemicals and cruise lines.
Meanwhile, high yield has decompressed across rating cohorts (meaning triple-C rated bonds have underperformed), but the risk of broader credit deterioration remains skewed towards the leveraged loan and private credit markets.
Potential AI winners and losers
Software and data service issuers experienced volatility in the first half of 2026 but started to see more dispersion in the second quarter as the market attempted to determine the potential winners and losers from AI disruption.
Some 95% of leveraged loan software exposure is single-B rated or lower, and many of these issuers have remained at distressed trading levels despite strength in the rest of the market.3
Any shift in the volume of redemption requests from private business development companies (BDCs) and semi-liquid funds could potentially provide a catalyst – either positive or negative – for credit markets over the next couple of quarters.
The flip side of the AI story is that high yield companies linked to semiconductors or construction services for data centres and telecoms continue to witness very strong results.
There has been approximately $48 billion of ‘pure-play’ AI-data centre issuance in the US high yield market dating back to May 2025 (amounting to roughly 3% of the index), which has primarily consisted of issuance from cloud infrastructure providers alongside project finance-style debt used for data centre construction.4
We remain disciplined on this segment in assessing valuation and credit fundamentals before committing capital.
Potential opportunities for selective investors
While pressures persist, the overall environment remains supportive. An average yield for US high yield of around 7% offers potentially attractive income opportunities with the potential to absorb short-term price volatility.
And while a slightly wider spread range towards year-end is possible, fundamentals remain solid overall.
Importantly, the shorter duration of the US high yield market, of around three years, has helped mitigate sensitivity to rising Treasury yields. Back in 2021, US high yield had a duration closer to 4.5 years and a yield closer to 4%, meaning that there was a lot more legwork that needed to be done to reprice the inflationary shock when oil prices spiked in 2022.
But even if the overall market has shortened in duration, we believe the short duration segment itself (which we define as securities with expected take-outs within three years) continues to offer a particularly attractive balance of potential risk/return outcomes, with a high capture of the overall market yield complementing its more defensive characteristics.
An overweight to short duration securities may also be used effectively to ‘anchor’ a full duration portfolio, which can be used as part of a ‘barbell’ strategy to seek out idiosyncratic credits further up the risk spectrum.
The decompression experienced by the US high yield market this year has created a broader opportunity set in this higher yielding segment of the market for selective investors.
Looking ahead, much depends on whether the market’s expectations for default rates shifts higher over the coming months, which we will still think is unjustified for high yield, based on fundamentals.
For the broader leveraged finance market, that is a more challenging question – particularly in relation to private equity sponsored companies who may seek to conduct opportunistic exchanges on investments that are valued significantly below their original purchase price – notably in the software space.
In any case, rigorous credit analysis and active portfolio monitoring will be essential in being able to identify and manage these risks, while seeking out potential opportunities that the current volatility creates.
[1] Source: BNP Paribas Asset Management, ICE BofA US High Yield Index daily returns for 2026 year to date , as of 6 August 2026. Max drawdown occurred on 27 March 2026 and was fully recovered by 14 April, constituting a recovery period of 11 business days.
[2] Source: ICE BofA US High Yield Index OAS (option-adjusted spread). Data as of 7 August 2026.
[3] Source: BofA Global Research, LCD, ICE Data Indices, as of 29 January, 2026.
[4] Source: BNP Paribas AM as of 30 June 2026.
