Systematic Insights: High yield: CCCs friend or foe? | Insight Investment

Recent widening in CCC bonds may present opportunities for systematic and liquid high yield strategies that can screen the CCC universe based on “quality” fundamental indicators and take a surgical approach. 

Credit spreads have remained remarkably stable over 2026 so far, even though it has been a volatile few months for equities.

CCC-rated debt has been the major exception, where spreads have widened closer to post-pandemic highs in recent months (Figure 1).

Figure 1: CCCs have been the one area of credit markets to notably widen so far this year¹

The CCC market represents 9% of the total US high yield market at $132bn.

Its weakness has partly reflected poor performance in structurally challenged sectors like media and broadcasting, cable and broadband and building and construction products.

CCCs have widened by 237bp year-to-date, offsetting tightening in their much larger BB and B rated counterparts (where spreads have narrowed by 11bp and 4bp respectively), leaving the broad US high yield market 3bp wider overall¹.

A surgical approach could potentially screen out the most vulnerable CCCs

We split the CCC market into five quintiles based on a proprietary systematic “quality” factor, which uses a range of fundamental issuer metrics as inputs. The highest quality issuers are in the top quintile, and the weakest are in the bottom quintile. 

Much of today’s bottom quintile is currently suffering credit distress, and trades accordingly with average spreads approaching 2000bp. Many are legacy leveraged buyout (LBO) capital structures in cyclically and secularly challenged sub-sectors within areas like communications, consumer discretionary, software and finance.

The top four CCC quintiles are not entirely free of LBOs but are more heavily weighted toward publicly listed companies.

Our results show that most major weakness in CCCs this year has been concentrated in the bottom quintile (Figure 2). The top four CCC quintiles have lagged BB and B rated bonds year-to-date but have held up much better performance-wise.

Figure 2: The lowest quintile of CCC bonds appears to have been responsible for most of the severe weakness in CCCs this year²

Taking a longer-term view, the bottom CCC quintile has consistently offered a poor risk-return trade-off (Figure 3).

However, the top four quality CCC quintiles have fared much better. They may have been subject to significantly more volatility than BB and B rated sectors but have offered higher excess returns as compensation.

Figure 3: The top four CCC quality quintile’s higher historical risk and return profile may have its place in a high yield strategy²

In our view, a systematic high yield strategy that can access a high degree of liquidity and implement a highly diversified high yield strategy may benefit from maintaining a benchmark-level of CCC exposure, concentrated on higher-quality CCC names.

Traditional discretionary high yield strategies often struggle to invest in CCCs. Due to limitations around liquidity and credit coverage they may run relatively concentrated portfolios. Meaningful CCC exposure can therefore dominate returns.

Picking the right strategy is therefore vital.

The top four quality CCC quintiles have widened by ~170bp year-to-date with credit spreads close to 600bp (a significant uptick from Bs at ~260bp³). In a market rally, avoiding CCCs could detract from performance.

In our view, a surgical approach may be able to extract value from that widening.