Systematic Insights - keep calm and "carry" on? | Insight Investment

Last month we highlighted that while high yield credit spreads are compressed, we believe that they may offer compelling income. There may be value in locking in all-in yields while they are still available. 

High yield may still offer attractive income

While high yield credit spreads are historically tight, all-in yields remain around their average levels over the last few years (Figure 1). Locking them in can potentially secure a compelling level of income for years to come.

Figure 1: Spreads are tight, but all-in yields indicate potential value from carry¹

Further, there may be potential for capital gains if investors hold for the medium to long term.

Markets expect the Fed to cut rates over the next few meetings, which has helped yield curves steepen. High yield credit curves are also relatively steep, particularly in the case of B rated corporates (Figure 2).

If these curves remain steep, it implies potential value from locking in yields (or “carry”) and benefiting from falling yields and spreads over time as the bonds approach maturity (known as “rolling down the curve”).

Figure 2: Steep yield curves indicate potential benefits from “rolling down” the curve²

The default environment may support a “carry and roll” strategy

Although the government shutdown has delayed key data releases, our base case remains for US growth to slow without contracting.

There are risks, highlighted by the labor market, where job gains have been consistently revised down this year (Figure 3 – left), which has helped prompt the Fed’s renewed rate cutting cycle. On the flip side, there are also opportunities, the AI boom appears to be a tailwind for business investment (Figure 3 – right). 

Figure 3: The economy is slowing, holding through the noise may yet work well for credit investors³

In our view, as long as nominal GDP (which printed at 6% SAAR in Q2 2025⁴) remains in positive territory, we expect corporate defaults to remain relatively contained. Fundamentals and trends toward selective defaults may also be supportive.

Absent an outsized default event (like the pandemic), US high yield markets has the potential to deliver higher yields than investment grade markets net of default losses over the next 12 months (Figure 4).

Figure 4: Yields may still offer compelling compensation for risk⁵

Conclusion: Don’t underestimate the power of yield

Over the long-term, yields rather than prices have dominated high yield total returns. Since 2000, high yield markets have returned 6.4% pa, with 7.7% coming from income and -1.2% coming from price movements. With yields potentially still attractive, it could be worth considering locking them in for the long term while they are still available.

Vigilance is nonetheless required given economic and political uncertainties, but we think investors need to focus on signal rather than noise and where appropriate, a compelling strategy may be to keep calm and “carry” on.