High yield: three myths debunked | Insight Investment

US high yield corporate credit is difficult to ignore with yields at ~8.5%. Although investors need to be cautious in this uncertain environment, key myths around this asset class could hold investors back.

• Myth 1: Default rates are between 3% and 5%

• Myth 2: High yield is vulnerable to rising rates

• Myth 3: Liquidity is impossible to source

Myth 1: Default rates are between 3% and 5%

Reality: Default rates have averaged 1.5% pa

Many will be surprised to learn that the Bloomberg US High Yield Corporate Index¹ has only seen an average 1.5% pa default rate over the last 15 years (Figure 1).

Figure 1: US high yield default rates have been a lot lower than you may think²

Source: Bloomberg, Insight calculations, March 2023.

Historically, it has required a financial crisis (such as the start of the pandemic in March 2020 or the 2008 crisis) for US default rates to approach 4% or above. In 2021, defaults were the lowest in 15 years and rose only to 0.7% in 2022 even as recession risks built. We expect default rates to remain within historical norms, but even in the event of crisis-level defaults, history indicates the pain will be far less substantial than most have been led to believe.